Reference no: EM132844351

All Citrus Industries (ACI) is a manufacturer who sells to wholesalers who sell to retailers. After spending $250,000 for research and development (considered investment or sunk costs), chemists at ACI have developed a new breakfast drink. The drink, called Sunny C, will provide the consumer with twice the amount of vitamin C currently available in breakfast drinks.

• Sunny C will be packaged in an 8-ounce can and will be introduced to the breakfast drink market, which is estimated to be equivalent to 50 million 8-ounce cans nationally. One major management concern is the lack of funds available for marketing. Accordingly, management has decided to use newspapers (rather than television) to promote Sunny C in the introductory year and distribute Sunny C only in major metropolitan areas (areas which account for two-thirds of U.S. breakfast drink volume).

• Newspaper advertising will carry a coupon that will entitle the consumer to receive $0.50 off the price of the first can purchased. The retailer will receive the regular margin and be reimbursed for redeemed coupons by All Citrus Industries. Past experience indicates that for every five cans sold during the introductory year, one coupon will be returned. The cost of the newspaper advertising campaign (excluding coupon returns) will be $280,000. Other fixed overhead costs are expected to be $120,000 per year.

• Management has decided that the suggested retail price to the consumer for the 8-ounce can will be $1.00. The unit variable costs for the product are $0.25 for materials and $0.05 for labor. The company intends to give retailers a margin of 40 percent of the suggested retail price and wholesalers a margin of 20 percent of the wholesale price.

Problem 1: What is the contribution per unit for Sunny C in the first year?