Question

After a product recall triggered by salmonella contamination and repeated violation citations by the health department, Mc Burger Inc. is considering introduction of its first brand of soy-based gourmet burgers, Healthylicious-n-Safe. Each box of Healthylicious-n-Safe contains 8 burgers (similar to other meatless burger brands). An extensive marketing research undertaken by the firm indicated that there is a growing demand in the meatless burger market, with annual projected sales of 1,250,000 boxes (Note that this is the demand in the total meatless burger market and not the demand for the Healthylicious-n-Safe brand).
Mc Burger estimates that it will incur a fixed cost of $35,000/month. The variable cost of making one burger is estimated to be $0.875. Mc Burger plans to run a promotional campaign in the first 12 months of product introduction, which is estimated to cost a total of $275,000. Based on its marketing research Mc Burger expects an average customer to pay $9.00 for a box of Healthylicious-n-Safe.

Required:
Do you think Mc Burger should launch this new product? Is Mc Burger likely to break-even in 12 months? Is Mc Burger likely to break-even in 18 months?

Answer 1

Answer:

McBurger Inc.

Introduction of Healthylicious-n-Safe

I think that McBurger should launch this new product.  If McBurger can capture more than 28% of the meatless burger market, it can break-even in 12 months and start earning huge profits in 18 months when there will be nil promotion costs.

Explanation:

Annual projected market sales of meatless burger = 1,250,000 boxes

Content of each box of Healthylicious-n-Safe = 8 burgers

Fixed cost per month = $35,000

Total annual fixed cost = $420,000 ($35,000 * 12)

Estimated variable cost of making one burger = $0.875

Estimated variable cost of a box of 8 burgers = $7 ($0.875 * 8)

Cost of promotional campaign in the first 12 months = $275,000

Total annual fixed cost including promotions = $695,000

Expected selling price per box of Healthylicious-n-Safe = $9

Estimated variable cost per box of Healthylicious-n-Safe    7

Contribution margin per box of Healthylicious-n-Safe =   $2

Sales units required to break-even = Total fixed costs/Contribution margin per box

= $695,000/$2 = 347,500 boxes

This sales units break-even point represents 27.8% of the meatless burger market (347,500/1,250,000 * 100)