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After spending $600,000 for R&D, chemists at Cats Gone Wild have developed a new cat food called WOW-MEOW. The food will be packaged in an

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After spending $600,000 for R&D, chemists at Cats Gone Wild have developed a new cat food called WOW-MEOW. The food will be packaged in an 8-ounce can and will be introduced to the cat food market, which is estimated to be 42 million 8-ounce cans nationally. WOW-MEOW will be distributed in major metropolitan areas that account for 65% of the US cat food volume. The food will be promoted via newspapers and will offer a coupon for $0.40 off for the first can purchased-and the retailer will receive the regular margin and be reimbursed for redeemed coupons by Cats Gone Wild. Past experience indicates that for every 5 cans sold during the introductory year, one coupon will be redeemed. The cost for the newspaper advertising campaign will be $500,000 in addition to coupon redemption reimbursements. Other fixed overhead costs are expected to be $180,000 per year. Management has decided that the suggested retail price for the 8-ounce can to the consumer will be $1.00. The only unit variable costs for the product are $0.36 for materials and $0.12 for labor. The company intends to give retailers a margin of 20 percent off the suggested retail price and wholesalers a margin of 10 percent of the retailers' cost of the item. (a) At what price will Cats Gone Wild be selling WOW-MEOW to wholesalers? (b) What is the contribution per unit (8-ounce can)? (c) What is the breakeven unit volume in the first year? (d) What is the first year breakeven share of market? $1.00 $0.00 $0.00 $0.00 a. Selling price to wholesalers Retail price to consumer Less: Margin of 20% (price to retailer) Less: Margin of 10% (price to wholesaler) b. Contribution per unit Unit Manufacturing Selling Price Less Variable Costs: Material Labor Coupon (1/5 x $0.40 = $0.08) TOTAL Unit Contribution (UC) = Mftr Price - VC (per unit) c. Break-even unit volume in year one Total Fixed Costs: Advertising Overhead BE Unit Volume = FC / CM NOTE: Do not include $600,000 for R&D as this is a SUNK cost. d. First year Breakeven Share of Market Total U.S. Market Size Market served by marketing program Hence, .65 X 42,000,000 BE Unit Volume/ Mkt served size NOTE: The marketing program is only directed at a portion of the total market (relevant served market). #DIV/0! 0% #DIV/0

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