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Principles of Marketing

Break-Even Analysis

After spending $300,000 for research and development, chemists at Diversified Citrus

Industries have developed a new breakfast drink. The drink, called ZAP, will provide the

consumer with twice the amount of Vitamin C currently available in breakfast drinks. ZAP

will be packaged in an eight-ounce can and will be introduced to the breakfast drink market,

which is estimated to be equivalent to 21 million eight-ounce cans nationally.

One major management concern is the lack of funds available for advertising. Accordingly,

management has decided to use newspapers (rather than television) to promote the product

in the introductory year in major metropolitan areas that account for 65 percent of US

breakfast drink volume. Newspaper advertising will carry a coupon that will entitle the

consumer to receive $0.20 off the price of the first can purchased. The retailer will receive

the regular margin and be reimbursed by Diversified Citrus Industries. Past experience

indicates that for every five cans sold during the introductory year, one coupon will be

returned (20% redemption rate). The cost of the newspaper advertising campaign

(excluding coupon returns) will be $250,000. Other fixed overhead costs are expected to be

$90,000 per year.

Management has decided that the suggested retail price to the consumer