LOUISIANA Cereals estimated the demand for its generic breakfast cereal poorly. As a result, it currently has 50,000 more boxes of LOUISIANAs Toasted Honey Flakes than it was able to sell at the products usual price. LOUISIANA normally sells the toasted honey flakes to supermarkets for $200 per crate. Each crate contains 100 boxes of toasted honey flakes. Variable production costs average $1.28 per box.

LOUISIANAs management has come up with the following two options to address the current inventory of 50,000 boxes.

OPTION 1 EMPHASIZE INSTITUTIONAL SALES

Sell 25,000 boxes of toasted honey flakes to supermarkets at the usual price, and sell the remaining 25,000 to institutional buyers such as hospitals and schools at half of the normal selling price.

OPTION 2 ISSUE REBATE COUPONS

Print a coupon in the local newspaper offering consumers a rebate of $.50 for every box top of toasted honey flakes that is submitted to LOUISIANA. It will cost LOUISIANA $5,000 to advertise the campaign in local newspapers and process the rebates. Under this plan, LOUISIANA estimates supermarket sales of 45,000 boxes and estimates that 22,000 box tops will be submitted for a rebate. LOUISIANA will sell the remaining 5,000 boxes to institutional buyers for half of the normal price.

Required:

Which option is preferable? Why is this correct AND by how much?

LOUISIANA estimated that 22,000 box tops will be submitted, but they are interested in knowing how much room there is for error in this estimate. What is amount of box top rebates that will make both options equally desirable?

Assume that LOUISIANA chooses option 2. They are concerned about the possibility that too many people may request rebates. A revised estimate has come in and they now feel that as many as 35,000 rebate coupons will be redeemed. What is the highest amount of rebate that LOUISIANA can offer (per coupon) in order to ensure that option 2 remains preferable to option 1? Round your answer to the nearest penny.