Question

Question 1

Shannon’s distributes its beer through a wholesaler, Miller of Denton. The retail selling price for a six pack of its typical craft beer is $12.00. The retailer’s cost per six pack is $8.00. The wholesaler sells the beer to the retailer for this price. Shannon’s sells a six pack to the wholesaler for $5.40. Shannon’s variable costs of production, packaging, and distribution are $3.60 per six pack. Shannon’s has the following annual fixed operating and marketing costs:

Marketing Costs	$52,821
Consumer Advertising	$33,744
Trade Promotion	$30,000
Sales Promotion	$18,000

What is Shannon’s annual break-even in six packs of beer sold?

Question 2

Given the above information in Q1, Shannon’s wants to increase its sales to retailers by 20% in the next year. Management estimates that the incremental promotion program required to generate sufficient demand to boost sales by 20% will be:

Personal Selling Costs	$      60,000 (exclusive of commission)
Consumer Advertising	$      64,705
Trade Promotion	$      42,621
Sales Promotion	$      25,000

Shannon’s will need to hire an additional sales person (paid a salary and commission) and provide some added administrative support. The sales person’s salary plus administrative support will cost about $60,000 per year. The sales person’s commission will be the equivalent of $0.05 per six pack sold. The incremental costs of consumer advertising, trade promotion, and sales promotion necessary to support sales in the new market will be substantial as indicated in the table above. How many six packs must be sold to break-even on the incremental costs that are anticipated?

Question 3

Let’s modify the scenario from Q1 and Q2 a bit. Management estimates that the incremental promotion program required to generate sufficient demand to boost sales by 20% will need to be:

Marketing Costs	$      60,000 (exclusive of commissions)
Consumer Advertising	$      57,188
Trade Promotion	$      42,467
Sales Promotion	$      25,000

The total market for craft beer sold in six-packs is about 2,500,000 six-packs per year. What market share will Shannon’s need to capture in order to break-even on the incremental costs that are anticipated? Express your answer in percent format to two decimal places. For example, 5.00 for five percent or .50 for one-half of one percent. Do not include the percent sign. Use the same contribution from the last question.

Answer 1

Question1
	Annual Fixed Costs:
	Marketing Costs	$52,821
	Consumer advertising	$33,744
	Trade Promotion	$30,000
	Sales Promotion	$18,000
	Total Fixed Costs	$134,565
	Selling Price for Shannon's	$5.40
	Variable costs	$3.60
	Unit (Six pack)Contribution	$1.80	(5.4-3.6)
	Break even quantity =Fixed Cost /Unit Contribution
	Break even quantity =	74,758	(134565/1.8)
	Break Even annual sales	$403,693	(74758*5.4)