Introduction The muesli market in Germany has some distinct characteristics that will influence company strategy. Your understanding of cost behavior will help you take advantage of the markets. Here is some information about the market. "As a manufacturer, you do not sell directly to the end consumer but rather to a variety of retail stores. Competition and margins in the breakfast cereals market is very tight. While the total demand for ready-to-eat cereal is relatively stable throughout the year the net sale of local brands of muesli cereal was not. Traditional ready-to-eat cereal seems to offer genuine competition to the local muesli brands. ... There are four key decision areas that each firm can use to influence the sale of their specific muesli cereals product recipes, marketing, price and product availability. We will focus on pricing and sales volume for this case study. Stores that carry breakfast cereals in Germany can be roughly classified into three types, largely based on their size. Each type of store has similar buying behavior. The consumers that shop of each type of store also share some characteristics, at least with regard to the purchase and consumption of muesli. Your firm maintains 3 standard pricelists for all your products, one for each type of store. It will be your responsibility to maintain these 3 price lists. Understanding the importance of various factors affecting the buying decisions of each type of store is essential to pricing effectively. Grocery stores are the main distribution channel for the muesli industry. Grocery stores offer their customers more variety than the other types of stores. A typical store would carry several different flavors and sizes of muesli on their shelves. If a grocery store is to carry an individual firm's brand, they will want to buy more than just one type of muesli. Grocery stores typically buy 4 different products at a time from each individual firm. Which firm they buy from depends on the overall best deal of 4 products, considering availability, price, recipe and consumer product preferences. Independent grocers or convenience stores are small proximity stores. They sell a small variety of products: beverages, beer, dairy products, snacks, newspapers and magazines, and some everyday non-perishable food products including muesli cereals. Convenience stores have limited shelf space, and will only carry a few types of muesli, whether that be different brands or different flavors. They only carry the 500g size boxes. Given the lack of variety, shelf space, and volume in sales they will want to carry the flavors and recipes preferred by their consumers, and typically place orders for a limited quantity of just one product at time. Consumers buying muesli at convenience stores are typically not looking for a good price, and so it is much easier for these retailers to pass on any price changes you make. Prices are on average 15% to 20% higher in convenience stores than in traditional grocery stores. However, these consumers are relatively easy to influence with in store promotions (marketing). Large discount stores or hypermarkets are a growing phenomenon. They not only sell food, they also sell books, CDs, clothing, and electronic appliances. These stores have managed to attract a large number of consumers looking for cheaper prices. Hypermarkets are a high volume, low margin business and are very sensitive to price changes. If a hypermarket is to carry an individual firm's brand, they will want to buy more than just one type of muesli, typically buying large quantities of 3 different products at a time from each individual firm. They only carry the 1kg boxes, and the products are sold at prices 5% to 10% lower than in traditional grocery stores." Problem Statement: Case Details Recall that there are twelve products sold by Muesli AG. For simplicity, we will analyze as if there is one product, mixed fruit muesli in the 500g size box. However, the analysis can easily be extended to all flavors and sizes of muesli with a few additions to our Excel worksheet. In addition, we might choose to analyze all of our products together. For example, we might ask how product mix affects our profits? Which products should we promote and sell more of given the constraints of the market? A contribution margin statement is given below. Sales during the period were 30,000 boxes of muesli. Contribution Margin Statement Sales Revenues 225,000 Variable Expense 163,500 Contribution Margin 61,500 Fixed Expenses 47,875 Net Operating Income 13,625 Figure 1: Muesli AG's Contribution Margin Statement Using the contribution margin statement as a starting point, examine various scenarios to help inform your decision regarding pricing, marketing, and product recipe changes. Assume that your analysis is within the relevant range; in other words, cost behaviors do not change within the parameters of our analysis. Instructions: Use formulas and links to cells in the worksheet provided in order to answer the following questions. Scenario 1 Using the contribution margin statement in Figure 1, answer the following questions 1. What is the contribution margin ratio (rounded to 2 decimal points)? 2. What is the variable expense ratio (rounded to 2 decimal points)? 3. What is the profit margin (net operating income percentage)? 4. What is the sales price per box of muesli? 5. What is the variable cost per box of muesli? 6. What is the contribution margin per box of muesli? 7. How many boxes of cereal does Muesli AG need to sell to break even? 8. What will be the sales revenue at the breakeven point? Insert formulas and cell references into the "gold" cells below. Ratios Per Unit Information Break Even [7] # of Boxes [8] Sales Revenue Scenario 1 Contribution Margin Statement 30,000 boxes sold Sales Revenues 225,000 Variable Expense 163,500 Contribution Margin 61,500 Fixed Expenses 47,875 Net Operating Income 13,625 [2] [1] [4] [5] [6] CM per unit [3]