$1$

EXERCISE $1-$ DIVERSIFIED CITRUS INDUSTRIES

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 $8-$ounce can and will be

introduced to the breakfast drink market, which is estimated to be equivalent to

$21$ million $8-$ounce cans nationally.

One major management concern is the lack of funds available for marketing.

Accordingly, management has decided to use newspapers $($rather than

television$)$ to promote Zap in the introductory year and distribute Zap in major

metropolitan areas that account for $65\%$ of U$.$S$.$ breakfast drink volume.

Newspaper advertising will carry a coupon that will entitle the consumer to

receive $$0\mathrm{.}20$ off the price of the first can purchased. The retailer will receive the

regular margin and be reimbursed for redeemed coupons 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 Bounce can will be $$0\mathrm{.}50.$ The only unit variable costs for the product are

$$0\mathrm{.}18$ for materials and $$0\mathrm{.}06$ for labor. The company intends to give retailers a

margin of $20\%$ off the suggested retail price and wholesalers a margin of $10\%$

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?