After spending $300,000 for R&D, chemists at DCI Inc. have developed a new breakfast drink. The drink, called Zap, will provide the consumer with twice the amount of Vitamin C currently available in breakfast drinks.
Zap will be packaged in an 8-ounce can and will be introduced to the breakfast drink market, which is estimated to be equivalent to 21 million dollars sales of 8-ounce can nationally.
One major management concern is the lack of funds available for marketing. Accordingly, management has decided to use newspapers (rather than television) to promote Zap in the introduction year and distribute it in major metropolitan areas that account for 65 percent of U.S. breakfast drink volume.
Newspaper advertising will carry a coupon that will entitle the consumer to receive 0.20 off the price of the first can purchased. The retailer will receive the regular margin and be reimbursed for redeemed coupons by DCI.
Past experience indicates that for every five cans sold during the introductory year, one coupon will be returned. The cost of the newspaper advertising campaign (excluding coupon returns) will be $250,000. Other fixed overhead costs for Zap are expected to be $90,000 per year.
DIC has decided that the suggested retail price to the consumer for the 8-ounce can will be $0.50. The unit variable costs for the product are $0.18 for materials and $0.06 for labor. DCI intends to give retailers a margin of 20 percent off the MSRP (Manufacturer Suggested Retail Price) and to give the wholesalers a margin of 10 percent of the retailers' cost of the item.
1. At what price will DCI be selling its product to wholesalers?
2. What is the gross profit for each unit of Zap in the first introduction year? (Hint: Don't forget the coupon issue. Coupon is a form of price deduction and should be considered as a part of the variable cost, hence it will affect the profit margin. But what to do with the 1-in-5 of redemption rate? If one coupon is redeemed for every 5 coupons, how much is the cost for each unit on average?)
3. What is the break-even volume in the first introduction year? (Should the $300,000 R&D investment be considered?)
4. What is the break-even market share (%) in the first year? (Are we talking about revenue market share or unit market share? How big is the target market?)
5. In the second year, if there would be no advertising spending and coupon promotion for Zap, what would be the break-even market share in that year?