You are working as an assistant to the vice president for marketing at Long Life Incorporated, a start up manufacturer of a healthy, minimally refined breakfast cereal. Since little processing will be done, much of the cost of the product will be in the premium ingredients. The company will be investing $3 million in processing and packaging facilities to produce a maximum of 15,000 cases of cereal per month. It will advertise and market only in a restricted regional area in the foreseeable future, although expansion is possible in the long run. Fixed costs for operating the facility will be approximately 85,000 per month. Variable costs, primarily for ingredients and labor, are expected to be approximately 17 per case. In the past, most cereals of this sort have been sold at specialty stores for high prices. However, in recent years, some have moved into supermarkets at prices that are competitive with those of traditional cereals. A marketing research study has given you estimated results after the first year for three possible scenarios:
1. Sell to supermarkets for 29 per case, spend 25,000 per month on advertising, and sell approximately 11,000 cases per month. The average price grocery stores pay competitors for a case of this size is 30, and 25,000 is a minimal monthly budget for advertising in the local area.
2. Sell to supermarkets for 31 per case, spend 40,000 per month on advertising, and sell approximately 12,000 cases per month.
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3. Sell to specialty stores for 34 per case, spend only 7,000 per month advertising in health food periodicals, and sell approximately 7,500 cases per month.
A. Prepare a schedule (using the format on the next page) that shows the pro forma (or expected) profit from each scenario.
B. Write a report for your company president and vice presidents in which you analyze each of the above strategies and make a recommendation concerning which one to choose.
C. Also include discussion of any long-term trends and other outside factors that you feel should be considered in making this strategic decision.