Question 3 (15 points)

Consider a microbrewery that wants to enter the Quebec market. Total demand for micro beer in Quebec is 85 million bottles per year.

Variable cost for this microbrewery include:

Malt: $0.23 per bottle Hops: $ 0.15 per bottle Yeast: $0.09 per bottle Labor: $0.25 per bottle Packaging: $1.10 per bottle Other variable costs: $0.85 per bottle Fixed costs include:

Rent and Utilities: $33,000 / month Managerial Salaries: $1,200,000 / year Other operating expenses (excluding advertisement): $400,000 / year

Desired retail price for a pack of 6 beers: $34.99

The company plans to invest quite a bit of money in advertising to ensure a strong response from consumers and guarantee a quick break even. They are planning to invest $1 million in advertising in year 1.

a) If their objective is to acquire 3% of the market in the first year and break even (make profit of $0), what trade margin on selling price will they have to negotiate with the retailers in year 1?

b) Suppose that the retailers dictate a strict 38% trade margin on selling price for all new companies that are seeking distribution.

At what retail price will they have to sell their pack of 6 beers in stores to be able to make a profit of $300,000 in the first year? (3 points)