Shangri-La Videos is marketing a new line of wellness-oriented videotapes. These videotapes emphasize proper nutrition, low-impact exercise, and stress reduction techniques. Shangri-La’s marketing director (and president), Sherry Benson, believes that a comprehensive marketing campaign to introduce the videotapes will be necessary. Sherry has estimated the following marketing costs:

Commission ............3% of undiscounted price

Marketing testing ..........$7,000 per city

Rebates:

Fixed cost to print the certificates .....$625

Variable cost to redeem each certificate ..$7.50

Advertising:

Quarter 1 ...............$25,000

Quarter 2 .............$50,000

Quarters 3 through 7 ..........$20,000 per quarter

Quarter 8 .............none

The market testing will occur during the first quarter. Sherry believes that conducting tests in three cities will be sufficient to gather feedback regarding the video. Sherry estimates that the total cost of writing the script and producing the master for the videotape will come to $55,000. The cost of copying a new videotape from the master, packaging, and shrink-wrapping it will be $3 per tape. The videotape market is fickle and competitive. Sherry believes that the wellness tape can be sold for eight quarters at the most. Her estimates of unit sales for each quarter are as follows:

Quarter Unit Sales

1 ........5,000

2 ........15,000

3 ........27,000

4 ........30,000

5 ........30,000

6 ........30,000

7 ........15,000

8 ........2,000

In Quarters 1 through 7, the videotape will be priced at $20. In Quarter 8, the price will decrease to $10, and no commission will be paid. In Quarter 1, the rebate certificate will be attached. Customers who buy the videotape and mail in the certificate (with original cash register receipt) will receive $5 by return mail. Past experience indicates that only 25 percent of the customers eligible for the rebate will take advantage of it. (The remaining 75 percent who do not claim the rebate are referred to as “slippage.” Companies count on a hefty amount of slippage when offering a generous rebate program.)

Required:

Form groups of three or four. Each group will work this exercise. Be prepared to share with the class the group’s discussion of Requirements 1 and 3.

1. Tell which phase of the product life cycle for the wellness videotape applies to each quarter.

2. Prepare income statements for each of the eight quarters. (You may round all amounts to the nearest $1,000.) Is the videotape profitable in each quarter? Overall?