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Where a Competing Company Should Spend $40 Billion

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Corben Inc. has a successful brand with the name Crunz. The market size in which Crunz competes 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. Corben Inc. 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 for this brand are expected to be $40 million.

If it is launched, Zaturn will capture 10% of the market. It has a contribution margin of 40%. Half of the sales of Zaturn will be cannibalized from the sales of Crunz. An alternative strategy for Corben Inc. is 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 for 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 calculations!

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Solution Summary

The solution advises where the company should spend $40 million and why in 126 words with all calculations shown.

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Total profit from Crunz:

400 *30%- 120 million less fixed costs of 20 million or 100 million dollars.

If Zaturn is launched:

Sales (10% of 4 billion) or 400 million

Profit from ...

Solution provided by:
Sandeep Bardia, MBA
Education
  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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