Question

1. Innovation products international is a health foots company which recently discovered that increased soy isoflavones in a persons diet has been able to extend a persons life span by at least 20years. The company developed a new product called " soy for life" which is a tasty breakfast bar that contains 500 mg of soy isoflavones in each bar. Cost of research and development for the product was 2,250,000$. The breakfast bar market size is correctly measured at 80 million units of which IPI serves 45%. Initial taste tests concluded that consumers are unable to make any taste distinction between a regular breakfast bar and one that contains 500mg of isoflavones. IPI plans to launch this new breakfast bar initially across the US using its current distribution channel of supermarket chains and health food stores which have 5,000 locations combined. The company then plans to expand the product market area to include South America,Europe and Asia and also intends to setup manufacturing plants in these expanded market areas.

IPI fixed cost is currently as 1 million per year with the cost to produce each breakfast bar at 1.25$. The finding of several research studies has determined that consumers would be willing to pay 8.25$ for "spy for life" breakfast at which the retail selling price would be targeted. The retailers margin is 35%,the wholesalers margin is 15%

(Round partial units upward. Round percentages to one decimal point. Round currency to dollar and cents)

a) what is the company's selling price of one "soy of life" breakfast bar to its wholesalers?(the selling price is not $8.25)

b) what is the products contribution margin as a percentage?

c) what is the products contribution per unit in dollars?

Answer 1

a) Let the selling price for the company be x to the wholesaler. The wholesaler's margin = 15% of x = 0.15x.

Sale price to retailer = x+0.15x = 1.15x. Retailer's margin = 35% of 1.15x = 0.40x. Therefor the selling price to consumer = 1.15x+0.40x = 1.55x, which can be maximum $8.25

Thus, the value of x = 8.25/1.55 = 5.31, which is the selling price to wholeseller.

b) contribution margin percentage = (sale price - V.Cost)/Sale price = (5.31-1.25)/5.31 = 76.46%

c) per unit dollar contribution = sale price - V.cost = 5.31-1.25 = $4.06 per unit