You are the marketing manager for the Ariadne brand of products. You have developed a new product in this line and have been preparing the marketing strategy for the launch of this product. You have already decided on the version of the product to launch, and what price to charge retailers for it and the best distribution option. You have determined that the best distribution strategy involves key retailers such as Shoppers Drug Mart. You have also performed the required financial analysis that reflects how much profit will be generated from the product and the associated costs. The financial analysis includes the impact of the decision to reduce the price for key retailers in your channel of distribution. It is the companys policy to provide a reduced price for key retailers because of the higher quantities of the product they sell. Now you must finalize the marketing communications spending that the brands communications campaign will be based on. You have two options given the brands marketing objective of becoming a solid number 2 or 3 player in this already saturated market. You can either spend at a comparable level to competition or you can spend more than competition. You cannot spend less than competition since that would undermine Ariadnes potential for achieving its marketing objective.

The original financial estimates you have developed for Ariadne thus far have assumed that your communications spending will match competition, which you have estimated at $5.00 per case. You are considering increasing this level by 20% to $6.00 per case.

Revise your financial analysis for Ariadne to establish whether increasing your communications spending from $5.00 to $6.00 per case is affordable. Note that the sales volume estimate for Ariadne has been increased in the third estimate to reflect the increased demand expected for the brand as a result of having stronger communications support.

In order to do a financial analysis, marketers must calculate the estimated profit.

Estimated profit is the expected sales minus the fixed and variable costs.

The formulas for calculating profit are:

Sales = number of units X the price per unit

Variable costs = number of units X the variable cost per unit

Profit = sales fixed costs variable costs

Marketers often calculate the profit margin to help them decide between alternatives. Profit margin is the percentage of profit in relation to sales. The formula for profit margin is:

Profit Margin % = Net profit estimated sales X 100

For the Ariadne brand the company wants to achieve a profit margin of 33%.

Ariadne

Original Estimate

Ariadne

Revised Estimate 2

Ariadne

Revised Estimate 3

Estimated Total Annual

Sales Volume (cases)

120,000

120,000

125,000

Estimated Selling Price per case ($)

28.00

60,000 cases @ $29.88;

60,000 cases

@ $28.39

62,500 cases @ $29.88;

62,500 cases

@ $28.39

Total Fixed Costs ($)

750,000

750,000

750,000

Average Variable Cost per case excluding

communications ($)

7.50

7.50

7.50

Average Variable Cost per case

communications ($)

5.00

5.00

6.00

Total Average Variable

Cost per case ($)

12.50

12.50

$13.50

Record your revised profit and loss estimate for Ariadne B in the following chart:

Ariadne Original

Estimate

Ariadne Revised

Estimate 2

Ariadne Revised

Estimate 3

Sales Revenue ($)

3,360,000

3,496,200

Total Fixed Costs ($)

750,000

750,000

Total Variable Costs ($)

1,500,000

1,500,000

Net Profit ($)

1,110,000

1,246,200

Profit Margin (%)

33.0

35.6

2. Based on the above financial estimates, should support spending on communications for Ariadne be set at $5.00 per case or $6.00 per case?

3. Given your answer to the above question, what absolute level of marketing communications spending will the brands communication campaign be based