Quencher Beverage is a large regional retail establishment. Quencher recently decided to start selling one of its most popular products—Quencher Hard Seltzer 24-packs—at a loss (i.e., a loss leader) in order to entice consumers to purchase other items in greater amounts than they would otherwise purchase. Quencher’s loss leader pricing rule is to set unit price by marking up its unit variable product cost by 20% (as opposed to marking up full unit cost by a much larger percentage as it does for regular products). Quencher’s accounting system reports a full unit cost for each 24-pack (considered as one unit) of $10.00. 

Quencher’s full unit cost is based on an expected volume of 30,000 units and is comprised of its variable product costs, $2.00 per-unit for shipping, $50,000 of allocated fixed cost for R&D product packaging redesign, and $40,000 of allocated fixed cost for customer service-related activities (phone hotlines, website complaint monitoring, replacement of faulty or bad products, etc.). Quencher expects to sell 30,000 units (i.e., each participating customer will purchase one 24-pack). 

Part 1 

Requirements: Budgeted Results Calculate Quencher’s unit variable product cost. Calculate Quencher’s 24-pack loss leader unit selling price, as well as expected total 24-pack revenues. 

Quencher anticipates that the Hard Seltzer loss leader strategy will bring in additional customer traffic that will result in incremental contribution margin of $100,000. Also, assume that the R&D costs and customer service-related costs are unaffected by Quencher’s Hard Seltzer loss leader decision. Calculate the expected total net financial impact from using the Hard Seltzer 24-packs as a loss leader. Part 2 Requirements: Actual Results Unfortunately, upon reviewing the actual results, Quencher management was extremely disappointed with the performance of its Hard Seltzer loss leader strategy. The perplexing part was that Quencher actually sold considerably more 24-packs than expected (ten times more to be exact), but the store’s overall profit was down considerably. Upon conducting interviews with store employees, one cashier shared the following observation with 

Quencher management: “I have observed many customers checking out through my lane. Do you know what I have learned fits perfectly inside a Quencher shopping cart?! Ten, 24- packs of Hard Seltzer with NO ROOM TO SPARE FOR ANYTHING ELSE!!” Finally, management now realizes that its regular contribution margin from non-loss leader products actually decreased by $200,000 as a result of loss leader customers filling their carts with excessive 24-packs and no longer buying as many regular products that they otherwise would have bought. Calculate the actual financial impact from Quencher’s decision to pursue the Hard Seltzer loss leader strategy. 

What suggestions do you have for Quencher management when and if the company decides to continue its Hard Seltzer loss leader strategy?