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Diversified Citrus Industries: Product Price to Wholesalers; Margin; Break Even in Units

After spending $300,000 for research and development, chemists at Diversified Citrus Industries have developed a new breakfast drink. The drink, called Zap, will provide the consumer with twice the amount of Vitamin C currently available in breakfast drinks. Zap will be packaged in an eight-ounce can and will be introduced to the breakfast drink market, which is estimated to be equivalent to 21 million eight-ounce cans nationally.

One major management concern is the lack of funds available for advertising. Accordingly, management has decided to use newspapers (rather than television) to promote the product in the introductory year in major metropolitan areas that account for 65 percent of U.S. breakfast drink volume. Newspaper advertising will carry a coupon that will entitle the consumer to receive $0.20 off the price of the first can purchased. The retailer will receive the regular margin and be reimbursed by Diversified Citrus Industries. Past experience indicates that for every five cans sold during the introductory year, one coupon will be returned. The cost of the newspaper advertising campaign (excluding coupon returns) will be $250,000. Other fixed overhead costs are expected to be $90,000 per year.

Management has decided that the suggested retail price to the consumer for the eight-ounce can will be $0.50. The only unit variable costs for the product are $0.18 for materials and $0.06 for labor. The company intends to give retailers a margin of 20 percent off the suggested retail price and a wholesalers' margin of 10 percent of the retailers' cost of the item.

a) At what price will Diversified Citrus Industries be selling its product to wholesalers?
b) What is the contribution per unit for Zap?
c) What is the break-even unit volume in the first year?
d) What is the first-year break-even share of market?

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After spending $300,000 for research and development, chemists at Diversified Citrus Industries have developed a new breakfast drink. The drink, called Zap, will provide the consumer with twice the amount of Vitamin C currently available in breakfast drinks. Zap will be packaged in an eight-ounce can and will be introduced to the breakfast drink market, which is estimated to be equivalent to 21 million eight-ounce cans nationally.

One major management concern is the lack of funds available for advertising. Accordingly, management has decided to use newspapers (rather than television) to promote the product in the introductory year in ...

Solution Summary

This solution provides calculations for price, contribution per unit, break-even unit volume and break-even market share.

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