1. CEO Chez Nut has decided to follow a few competitors and sell a premium chestnut puree. He thinks that the puree will appeal to higher income customers and upscale restaurants in the New York area. There are three other companies that sell chestnut puree to the same cohort of customers. To help facilitate a successful product launch, estimate the captured target market and determine the yearly breakeven price use information and calculation below.

a. Information to be given upon request: variable costs ($1 per puree can, $3 for ingredients per puree can, $0.50 for ingredient processing per puree can), fixed costs ($75,000 in additional labor costs per year, $36,000 for additional facilities costs per year, and $4000 for equipment repair costs per year)

b. Potential Variables to Consider

i. Income distribution (for both regular consumers and restaurants)

ii. Competitor effects

iii. Competitive response

iv. Product cannibalization

v. Purchase frequency

vi. Purchase volume

vii. Seasonality

c. Example Assumptions to Make:

i. Population of New York City (~8 million)

ii. % of high income households in New York City (~20-30%)

iii. Restaurants in New York City (20,000-30,000)

iv. % of upscale restaurants in New York City (~10%)

v. Chessy Chestnut Companys estimated market share (~15-25%)

vi. Consumer purchase frequency (~2x per month)

vii. Restaurant purchase frequency (~1-5x per day)

d. Calculation Walkthrough

i. Profit = Revenue Cost

ii. Profit = $0 (breakeven)

iii. x = quantity sold

iv. p = breakeven price

v. $0 = xp (Fixed Costs + Variable Costs)

vi. $0 = xp ($115,000 + $4.5x)

vii. Solve for p

1. Using the information/assumptions above. What is a yearly breakeven price?

2. Do you think your estimate is accurate? Why? Secondly, how could you have done better?

3. Examine the chestnut puree unit pricing table below. Based on the breakeven price you calculated earlier, should Chessy Chestnut Company follow through with the puree launch? Additionally, assuming that market shares are even between firms, what could the difference in price indicate?

Company Name

Chestnut Puree Price (per unit)

Nutty Nuts Co.

$6

Perfect Purees

$10

Chocolate Chestnuts Inc.

$8.50