Question

Consider the problem facing two firms, YumYum and Bertollini, in the frozen food market. Each firm has just come up with an idea for a new "frozen meal for two" which it would sell for $9. Assume that the marginal cost for each new product is a constant $2, and the only fixed cost is for advertising. Each company knows that if it spends $12 million on advertising it will get 1.5 million consumers to try its new product. Yum Yum has done market research which suggests that its product does not have any "staying" power in the market. Even though it could get 1.5 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future. Bertolini's market research suggests that its product is very good, and consumers who try the product will continue to be consumers over the ensuing year. On the basis of its market research, Bertollini estimates that its initial 1.5 million customers will buy one unit of the product each month in the coming year, for a total of 18 million units.Which of the following is most likely? A) Both YumYum and Bertollini will advertise. B). Neither YumYum nor Bertollini will advertise. C). YumYum will advertise, but Bertollini will not advertise. D). Bertollini will advertise, but YumYum will not advertise.

Answer 1

Answer:

D). Bertollini will advertise, but YumYum will not advertise.

Explanation:

Marginal costs represent the additional costs incurred by a firm arising from additional volume of production.

This would take to consideration major components of costs; variable, labor and fixed.

It is save to say that the firm is already in business and its existing production line will serve for the new product roll out, and if there will be need for an extra investment in the production line it will feature in its Marginal costs computation.

Let's look at YumYum

New product for 2

Selling price = $9

Marginal costs = $2

Profit = $7

The peak volume expectation in sales based on research is 1.5million orders

Profit therefore will be $7 x 1.5million = $10.5million

Projected Advert costs = $12m

If YumYum advertises, it will end in a loss position of -$1.5million. (I doubt the shareholders in YumYum will be willing to invest in advert on this product)

Now, let's look at Bertollini

New product for 2

Selling price = $9

Marginal costs = $2

Profit = $7

The peak volume expectation in sales based on research is 1.5million orders monthly = 18 million per annum

Profit therefore will be $7 x 18million = $126million

Projected Advert costs = $12m

If Bertollini advertises, it will be the right investment to take to sustain demand for its product. Besides it doesn't significantly impact its profit which will become $114m (The shareholders of Bertollini will allow the investment in advertisement)

Answer 2

Answer:

D). Bertollini will advertise, but YumYum will not advertise

Explanation:

Base on the scenario been described in the question between the two company which is Bertollini and YumYum, after both company have done the research, they discovered the advantage to either advertise or not, in the case of YumYum, it could not after after the research because it discovered that it product does not have any staying power in the future this will make them not to advertise

While in the case of Bertollini, after doing a market survey or research, it discovered that it product is very good and consumers who purchase the product will continue to buy over an issuing year, so it will advertise.