Question

Returning to our running case for Shannon’s Brewery introduced in the market share exercise, assume that Shannon’s is considering the introduction of a new craft beer called Irish Stout that will be derived from its award winning Irish Red. Initially, Irish Stout will only be sold “on premise” at the brewery. Currently, pints of Irish Red consumed on premise sell for $5.00 per pint with unit variable costs of approximately $2.75 per pint. Variable costs are predominantly comprised of the costs of ingredients and utilities that directly affect the brewing process. The new craft beer will be positioned at a slightly higher price, $5.25 per pint and its unit variable costs will be about $3.25 due to the higher cost of some ingredients. The relevant price, cost, and margin data are below.

	Irish Red		Irish Stout
Price	$      5.00		$      5.25
Unit Variable Costs	$      2.75		$      3.25
Unit Contribution	$      2.25		$      2.00

1.) Shannon’s Irish Red averages on premise sales of 1,200 pints per month. What is the anticipated profit (contribution dollars) per month associated with sales of Shannon’s Irish Red assuming that the Irish Stout is not introduced. Express your answer to the nearest dollar. Do not include the dollar sign.

2.) Assume that Shannon’s estimates that the sales of the new Irish Stout will be about 250 pints per month, but 27% of these sales will be cannibalized from sales of Shannon’s Irish Red. Compute the total combined increase (incremental increase or change) in contribution dollars for both Irish Red and Irish Stout expected with cannibalization . Express your answer to the nearest dollar. Do not include the dollar sign.

3.) Let’s stretch a little on this one. Assume Shannon’s Irish Red sells 1,000 pints per month in the absence of any cannibalization. Assume also that the new Irish Stout will sell 500 pints per month. The relevant price and cost data are:

Answer 1

1-	anticipated profit (contribution dollars) per month associated with sales of Shannon’s Irish Red	Units sold*contribution margin per unit sold	1200*2.25	2700
2-	contribution per month from sale of Irish Stout	Units sold*contribution margin per unit sold	250*2	500
	loss of contribution margin from the canabalization of sale of Irish red	Irish red monthly contribution margin*canabalization rate	1200*2.5*27%	810
	combined decrease in contribution margin			-310
3-	relevant price and cost data is not given