Question

EXERCISE 4

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.

At what price will Cats Gone Wild be selling WOW-MEOW to wholesalers?
What is the contribution per unit (8-ounce can)?
What is the breakeven unit volume in the first year?
What is the first year breakeven share of market?

Answer 1