Shangri-La Videos is marketing a new line of wellness oriented videotapes. These video¬tapes emphasize proper nutrition, low-impact exercise, and stress reduction techniques.

Shangri-La's marketing director (and president). Sherry Benson, believes that a compre¬

hensive marketing campaign to introduce the videotapes will be necessary. Sherry has es¬

timated the following marketing costs:

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. Cost of copying a new videotape from the master, pack¬ aging and shrink-wrapping it will be $3 per tape. The videotape market is fickle and com¬ petitive. Sherry believes that the wellness tape can be sold for 8 quarters at the most. Her estimate of unit sales for each quarter are as follows:

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% of the customers eligible for the rebate will take advantage of it. (The remaining 75% 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:
1. Tell which phase of the product life cycle for the wellness videotape applies to each quarter.
2. Prepare income statements for each quarter for the eight quarters. (You may round all amounts to the nearest $1,000.) Is the videotape profitable in each quarter? Overall?

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Commission Marketing testing Rebates: 3% of undiscounted price $7,000 per city Fixed cost to print the certificates $625 Variable cost to redeem each certificate $7.50 Advertising: Quarter 1 $25,000 Quarter 2 Quarters 3 through 7 Quarter 8 $50,000 $20,000 per quarter none