Corben Inc. has a successful brand with the name Crunz. The market size Crunz is
ID: 2801866 • Letter: C
Question
Corben Inc. has a successful brand with the name Crunz. The market size Crunz is competing is $4 billion, and Crunz has generated sales of $400 million. It has a contribution margin of 30% and annual fixed costs of $20 million. Creative Solutions is thinking of introducing a new brand under the name of Zaturn. Zaturn will compete in the same market as Crunz. The annual fixed costs of this brand are expected to be $40 million dollars.
If it is launched, Zaturn will capture 10% of the market. It has contribution margin of 40%. Half of the sales of Crunz will be cannibalized from the sales of Zaturn. An alternative strategy fort Corben Inc. would be to cancel the introduction of Zaturn and instead to spend the $40 million (on an annual basis) to promote Crunz. This action is expected to increase the sales of Crunz by 50%. Both brands (Cruz and Zaturn) sell at the same price.
Where should the company spend the $40 million and why? Show all calculation.
Explanation / Answer
Evaluation of the given proposals :
Existing Scheme
Proposed scheme of introducing Zaturn
Proposed Scheme of Investing 40 million Dollars in Cruz
Particulars
Additional Investment in existing Cruz
Existing Cruz
Introduction of Zaturn
Existing Cruz
Sales Revenue
$ 40,00,00,000
$ 20,00,00,000
$ 40,00,00,000
$ 60,00,00,000
Increase of 50% of sales
400000000000
4E+10
Refer notes
Refer notes
Less:
400000000
0%
Contribution Margin @30% for Cruz nad 40% for Zaturn of the Sales Revenue
$ 12,00,00,000
$ 6,00,00,000
$ 16,00,00,000
$ 18,00,00,000
0.10%
( 40,00,00,000*30/100, 40/100)
4000000000
Fixed cost ( given)
$ 2,00,00,000
$ 2,00,00,000
$ 4,00,00,000
$ 6,00,00,000
20 million + 40 million
$ 40,00,00,000
10%
Profit
$ 26,00,00,000
$ 12,00,00,000
$ 20,00,00,000
$ 36,00,00,000
Existing
Decision 1( cruz and Zaturn both Prodcts )
Decision 2
Profit under the three decisions
$ 26,00,00,000
$ 32,00,00,000
$ 36,00,00,000
It is better to choose the decision of investin in cruz as it gives more profit and Fixed cost will increase by 40 million in exceee for every year with this decision
Particulars
Cruz
Zaturn
1
Present market available
$ 4,00,00,00,000.00
4000000000
2
Sales Revenue
$ 40,00,00,000
3
Percentage of market captured (1/2)
$ 0.10
NOTES
*
So for the Zaturn 10% of the market has captured so the same sales will prevail as the selling price of the product remains same.
*
For the decision of investing 40 milion in cruz, the sales will increase by 50% of existing sales, that is 400 million * 150% = 600 million
Evaluation of the given proposals :
Existing Scheme
Proposed scheme of introducing Zaturn
Proposed Scheme of Investing 40 million Dollars in Cruz
Particulars
Additional Investment in existing Cruz
Existing Cruz
Introduction of Zaturn
Existing Cruz
Sales Revenue
$ 40,00,00,000
$ 20,00,00,000
$ 40,00,00,000
$ 60,00,00,000
Increase of 50% of sales
400000000000
4E+10
Refer notes
Refer notes
Less:
400000000
0%
Contribution Margin @30% for Cruz nad 40% for Zaturn of the Sales Revenue
$ 12,00,00,000
$ 6,00,00,000
$ 16,00,00,000
$ 18,00,00,000
0.10%
( 40,00,00,000*30/100, 40/100)
4000000000
Fixed cost ( given)
$ 2,00,00,000
$ 2,00,00,000
$ 4,00,00,000
$ 6,00,00,000
20 million + 40 million
$ 40,00,00,000
10%
Profit
$ 26,00,00,000
$ 12,00,00,000
$ 20,00,00,000
$ 36,00,00,000
Existing
Decision 1( cruz and Zaturn both Prodcts )
Decision 2
Profit under the three decisions
$ 26,00,00,000
$ 32,00,00,000
$ 36,00,00,000
It is better to choose the decision of investin in cruz as it gives more profit and Fixed cost will increase by 40 million in exceee for every year with this decision
Particulars
Cruz
Zaturn
1
Present market available
$ 4,00,00,00,000.00
4000000000
2
Sales Revenue
$ 40,00,00,000
3
Percentage of market captured (1/2)
$ 0.10
NOTES
*
So for the Zaturn 10% of the market has captured so the same sales will prevail as the selling price of the product remains same.
*
For the decision of investing 40 milion in cruz, the sales will increase by 50% of existing sales, that is 400 million * 150% = 600 million