Contribution analysis and break-even analysis are surely the most important and most frequently used marketing metrics. These analyses are essential to determine if a firm's marketing opportunity will mean a financial loss or be profitable.
As explained in the chapter, contribution is the difference between the selling price per unit and the variable cost per unit. Breakeven analysis that includes contribution tells marketers how much must be sold to break even or to earn a desired amount of profit. Happy Days Dairy is a producer of high-quality organic yogurt, sour cream, and crème fraiche. They are considering marketing a new line of drinkable yogurt for children. The new yogurt will be offered in packages of six 6-ounce individual containers and it will be available in four flavors. The company plans to use TV and newspaper advertising to promote the new product.
Distribution will be through major supermarket chains, which currently have over 90 percent of the U.S. yogurt market. The suggested retail price for each 6-ounce individual container will be $0.60. Because the retailer requires a 30 percent markup, Happy Days' price to the supermarkets will be $0.42 per six-ounce container. The unit variable costs for the product including packaging will be $0.15. The company estimates its advertising and promotion expenses for the first year will be $1,500,000.
1. What is the contribution per unit for the new children's yogurt product?
2. What is the break-even unit volume for the first year that will cover the planned advertising and promotion? The break-even in dollars?
3. How many units of the yogurt must Happy Days sell to earn a profit of $800,000?