Undertake a break-even analysis to determine when the company is likely to break-even on introducing Mountain Man Light. In doing your analysis account for the possible effect of MM Light cannibalizing the sales of MM. The company is introducing a lower margin product that will take sales from a higher margin product therefore it will cannibalize MM contribution margin.
Hints: Break-even unit sales = [fixed costs+ loss of contribution from sales cannibalization]/[contribution per barrel]. Contribution per barrel = price per barrel - variable cost)
Fixed cost: Advertising of $750,000 spent each year (page 6)
Incremental SG&A $900,000 (page 6)
1. Calculate the cannibalization cost. Light beer will cost $4.69 (page 6) more per barrel to produce. Assume a 5% cannibalization rate. Calculate the total cannibalization cost for year 1 using the 2005 sales of $50,440,000 (Exhibit 1) and applying the contribution margin (Exhibit 1). Adjust for the -2% contraction in the market. Remember to tell us when you expect the company to break even on the introduction.
2. Should Mountain man introduce a light beer? (Provide 3 most important pros and 3 cons. Each point should be made in no more than 2 sentences. Then conclude with your recommendation.