The Real Butter Company (RBC) is planning to introduce a new luxury spreadable butter brand into the UK market next year. From many years of experience, RBC knows that the success of any new brand depends on the state of the economy at the time of the launch. The better the economy is doing, the higher the likely profits from the new brand. After consulting their banks economists, CCL obtains the following forecast for the UKs economy for next year:

State of Economy Probability

Recession 0.40

Moderate growth 0.35

Boom 0.25

Expected sales volumes, selling prices and costs for each of the economic states are as follows for next year:

Recession

In the case of a recession, the company expects to sell 720,000 kg of the new butter next year. Listing fees (i.e. the amount that supermarkets charge to provide fridge space for new products) will be 500,000 for the year. Production, packaging and transport costs will amount to 10 per case (the butter is delivered in cases of 12 x 1 kg tubs) while advertising costs will be 750,000. The selling price during the first six months of the year) will be 3 per tub. During the second half of the year, all sales will be on the basis of 2 tubs for the price of 1 (based on the selling price per tub during the first 6 months). It is expected that 40% of total sales volumes will be sold in the first six months, and 60% in the last six months of the year. Merchandising fees charged by supermarkets to keep their fridges stocked with the butter will amount to 0.10 per kg of butter.

Moderate growth

If the economy shows moderate growth, RBC expects to sell 900,000 kg next year. Listing fees will be 650,000, and production, packaging and transport costs will be 14 per case. Advertising costs for the year will be 1.0 million. The selling price during the first four months of the year will be 3.50 per tub. 40% of sales during the last 8 months of the year will be at 4 per tub, while the rest of the sales during this period will be on the basis of 3 tubs for the price of 2 (based on the 4 per tub price). 270,000 kg will be sold during the first four months, and the balance during the last 8 months of the year. Merchandising fees will be 0.15 per kg.

Boom

If the economy booms, RBC should sell 1,200,000 kg next year. Listing fees will be 1.0 million; production, packaging and transport costs will be 15 per case, while advertising costs should be 1.5 million. The selling price will be 4 per tub for the first 3 months of the year. During the next 6 months, 50% of sales volumes will be at 5 per tub and 50% will be sold on the basis of 3 tubs for the price of 2 (based on the price of 5 per tub). During the last 3 months of the year, 60% of sales volumes will be at 4 per tub, while the rest will be at 2 tubs for the price of 1(based on a selling price of 4 per tub). 25% of total sales volumes will be sold during the first three months of the year, 50% will be sold during the next 6 months, and the remainder will be sold during the last 3 months. Merchandising fees will be 0.20 per kg.

The management team of RBC has decided that, if the Expected Value of profits from the launch of the butter next year is a break-even or better, they will launch the new brand.

Required:

(a) Advise RBC whether they should launch the new butter brand or not. Show the appropriate workings to support your advice.