Portland’s Best Food is introducing a new sandwich spread to compliment their current line of sauces. The company has high expectations for their innovative new spread. The CEO, Manuel Cruz, has asked your marketing team to look into the pricing problem for them. What should they price each jar of the spread?

In order to produce a new line of spreads they will have to buy some new equipment, which may be used for other spreads if needed. They have already bought the equipment for $15,000, which should last a year. They have also already negotiated advertising production and local magazine space with a local Advertising Agency. Their initial expenses are $24,000 in advertising as well as $20,000 in Administrative and selling expenses (for the 1^st year).

The advertising agency has come up with some creative ways to reach people in Portland at a low cost. The advertising agency has estimated that they should be able to sell 60,000 in the first year at the lowest price and only 50,000 a year at the highest price with $24,000 in advertising.

For an additional $6,000 in advertising, they should be able to sell 12,000 more at the low price and 8,000 at the highest price. 

It will cost Portland’s Best Foods $1 to make each jar (including the label, jar and contents). This is a little more than their regular spreads, because of the more expensive ingredients in the new spread. They know that the wholesaler will expect a 30% mark-up and the retailer will expect a 20% mark-up. They are considering two different mark-ups (40% or 50%) for Portland’s Best Foods. 

Questions (Show your calculations.)

1.        To get a 40% mark-up, what will Portland’s Best Foods charge their wholesalers?

a.         Assume just the VC (variable cost) for this question.

b.        What will the wholesalers charge the retailers and what is the final price to the consumers? 

2.        At the price they sell the wholesaler (answer in Q1) for each of the two mark-ups (40% and 50%), what is the minimum number of jars that Portland’s Best Foods needs to sell to break even in the first year? 

a. Use both FC and VC in this answer. (For advertising use only initial advertising costs not the additional advertising)

3. Should Portland’s Best Foods go ahead with the project (spending only the initial advertising budget) or should they cancel? 

a.  Why or why not? How much money do they make (lose) if they go ahead with the project (at each price)? 

b. How much money do they make (lose) if they cancel?

4.        Is it worth it for Best Foods to spend the extra $6000 on more advertising - at each of the two prices? 

a.         How much do they make (lose) if they spend more on advertising? 

b.        How much does the advertising cost them per jar? 

c.         Is this an appropriate amount of money to be spending on advertising?

5.        What price should Portland’s Best Foods charge? Why? 

a.        Their other lines of spreads sell for about $3.25. 

b.        What additional information do you need? 

c.         Do you think the product will be elastic or inelastic?