After spending $600,000 for R&D, chemists at Cats Gone Wild have developed a new
ID: 2422953 • Letter: A
Question
After spending $600,000 for R&D, chemists at Cats Gone Wild have developed a new cat food called WOW-MEOW. The food will be packaged in an 8-ounce can and will be introduced to the cat food market, which is estimated to be 42 million 8-ounce cans nationally. WOW-MEOW will be distributed in major metropolitan areas that account for 65% of the US cat food volume. The food will be promoted via newspapers and will offer a coupon for $0.40 off for the first can purchased—and the retailer will receive the regular margin and be reimbursed for redeemed coupons by Cats Gone Wild. Past experience indicates that for every 5 cans sold during the introductory year, one coupon will be redeemed. The cost for the newspaper advertising campaign will be $500,000 in addition to coupon redemption reimbursements. Other fixed overhead costs are expected to be $180,000 per year. Management has decided that the suggested retail price for the 8-ounce can to the consumer will be $1.00. The only unit variable costs for the product are $0.36 for materials and $0.12 for labor. The company intends to give retailers a margin of 20 percent off the suggested retail price and wholesalers a margin of 10 percent of the retailers’ cost of the item.
What is the first year breakeven share of market?
Explanation / Answer
Cats Gone Wild Details Amt $ Selling price per can 1.00 Coupon redemption chance 20% Variable cost of coupon redemption per can =20% of 0.40 0.08 Retailer margin @20% or retail price= 0.20 Retailers cost 0.80 wholesaler margin 10% of retailer cost 0.08 BEP Analyisi Details Amt $ per unit Total Amt $ Selling Price 1.00 Variable Materials cost 0.36 Variable labor cost 0.12 Coupon redemption cost variable 0.08 Retailer margin 0.20 Wholesaler's margin 0.08 Total variable cost 0.84 Unit Contribution margin 0.16 Fixed costs Advertisisng cost 500,000.00 Other fixed overhead 180,000.00 Total Fixed cost 680,000.00 Break even units =Fixed cost/unit contribution 4,250,000 cans Total market 42,000,000.00 cans Break even share of market = 10.12%