Question: Foods Inc (FI) sells 5 million units per year of its only product (SuperFood) through a major retailer. SuperFoods’ retail price is $5 per unit which included a margin to the retailer of 20%. SuperFoods’ manufacturing cost is $2 per unit. In order to promote sales, FI pays a sales broker 5% of the retail price of each unit sold. FI spends $3,800,000 per year in fixed costs (i.e. advertising, administrative costs and rent of the production facility).
1) Calculate SuperFoods’ per unit variable cost
2) Calculate SuperFoods’ unit contribution
3) Calculate SuperFoods’s Break Even Volume
4) Compare the BEV calculated above with the actual sales of SuperFood. Is FI making a profit? Why?
FI is planning to introduce a new product called ExtraFood at a retail price of $6 per unit using the same retailer (the marketing margin of the retailer is still 20%) and broker (brokerage fee is still 5% of retail price per unit sold). ExtraFood’s manufacturing cost is $3 per unit. In order to introduce ExtraFood, FI would incur additional fixed costs of $4,000,000 per year (e.g. research and development, advertising, depreciation on new equipment). Demand for the new product is estimated to be 2 million units, 50% of which is expected to come from SuperFood.
5) Do you recommend introducing or not introducing ExtraFood?