Yummy Foods, the maker of RICO the leading pasta brand in Canada, is considering introducing a fresh pasta brand called PRESTO. The proposed pasta includes penne, linguini and spaghetti.  They will be delivered in special refrigerated trucks to keep product freshness.  PRESTO will be able to charge a higher wholesale price of 3.49/unit compared to $2.99 for RICO.  However PRESTO variable costs are also higher than RICO; $1.85/unit vs $1.20/unit.

 

Yummy Foods is forecasting 150 million units of PRESTO within the first year.  Yummy Foods will require a $70 million investment in new equipment for the production of the new PRESTO products.  Currently total fixed costs for Yummy foods is $250 million.

 

One third of PRESTO's forecasted units will come from buyers who would normally purchase RICO (cannibalized sales).  The sales of RICO are currently 500 million units per year.

 

Answer the following questions:

1. What growth strategy is Yummy Foods undertaking? 

2. Will the launch of new PRESTO product be a financial success for Yummy Foods given current forecast?  Why? 

3. What's Yummy Foods breakeven units before PRESTO launch and after the launch to cover all fixed costs? 

4. Will your decision change if two thirds of PRESTO sales would be sourced from RICO sales? Why? 

 

Give financial facts to support your answers. Show work using below Pro-forma:

Quantity Price/unit Cost/unit Gross Margin/Unit Total $ Sales Total COGS Total Gross Profit Fixed Costs Net Profit Yummy Foods - RICO only $ 250 Million RICO $250 Million Yummy Foods - Forecast PRESTO $70 Million Total % Change