Contribution Margin Assignment

Discussion questions:

1. Undertake a break-even analysis to determine when the company is likely to break-even on introducing Mountain Man Light. In doing your analysis account for the possible effect of MM Light cannibalizing the sales of MM. The company is introducing a lower margin product that will take sales from a higher margin product therefore it will cannibalize MM contribution margin.

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Hints: Break-even unit sales = [fixed costs+ loss of contribution from sales cannibalization]/[contribution per barrel]. Contribution per barrel = price per barrel – variable cost) – see video below

I recommend the following steps:

Step 1:

First, determine the fixed cost per year each year of the forecasted period:

Your spreadsheet columns should be 2006 to 2010

Fixed cost: Introductory Advertising of $750,000 (page 6), Incremental SG&A $900,000 (page 6). Determine which fixed cost are repeated each year. 2005 sales were 520,000 barrels or $50,440,000 (see Exhibit 1).

Step 2: Determine contribution per barrel of beer for each year: Calculate the cannibalization cost. Light beer will cost $4.69 (page 6) more per barrel to produce. Assume a 5% cannibalization rate. Calculate the total cannibalization cost for 2006 using the 2005 sales of $50,440,000 and apply the contribution margin or gross margin (see Exhibit

Step 3

Determine sales for both beers for the period. Adjust for the -2% contraction in the market for regular beers. Also, you are provided with the initial market share estimate and growth rate for MM Light.

Your analysis should tell us when MM is expected to breakeven on MM Light and the B/E unit sales. Hint: MM Light will not B/E the first year. Be brave and post your analysis to the discussion board. Don't obsess and be embarrassed that your answer may be incorrect. It’s more about the learning process.

2. Should Mountain man introduce a light beer? (Provide 3 most important pros and 3 cons. Each point should be made in no more than 2 sentences. Then conclude with your recommendation. Get Accounting homework help today

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