M
ARKETING
B
REAK
E
VEN
P
RACTICE
(SPRING
2011)
1 of 6
February 15, 2011
Q
UAKER
I
NSTANT
O
ATMEAL
You are analyzing Quaker Instant Oatmeal as a consultant.
Lafayette Grocery sells a box of Plain
Quaker Instant Oats for $2.00 to consumers.
The grocery owner tells you that she gets a 25%
margin on each package. The local distributor for Quaker, Lafayette Snack Company, charges a 20%
markup. The manager of the Quaker Oatmeal Plant gives you the following data about the
production of the cereal.
There are no other relevant costs.
Equipment:
$17 million cost, straightline depreciated over 10 years, 0 salvage value
Product line workers and managers (includes salary & benefits):
$300,000/year
Advertising: $2,000,000 per year
Oatmeal ingredient:
$0.50/box
Individual wrappers:
$0.025/packet.
Each box contains 8 packets.
Delivery: $0.15 per box
a)
What is the selling price from Lafayette Snack Company to Lafayette Grocery for a box of
oatmeal? What is the selling price from Quaker Oatmeal plant to Lafayette Snack Company for a
box of oatmeal?
The selling price from Lafayette Grocery is $2.00 and it gets a 25% margin.
Margin= (price – cost)/ price
Cost for Lafayette Grocery = price ( 1 – margin ) = $2.00* (1 –
0.25 )= $ 1.50
Therefore the selling price from Lafayette Snack to Lafayette Grocery is $ 1.50
Lafayette Snack charges a 20% markup, and the selling price is $ 1.50
Markup = (price – cost )/ cost
Cost for Lafayette Snack
= price / ( 1+ markup) = $ 1.50/ 1.2= $ 1.25
So the selling price from Quaker to Lafayette Snack is $ 1.25
b)
Assume that all oatmeal produced at this plant is sold under the same distribution agreement,
price, and margins as Lafayette Grocery.
What is the unit contribution for a box of oatmeal for
Quaker Oatmeal Plant?
Unit Contribution = Unit Price – Unit variable cost
So Unit Contribution =1.25 – (0.5+ 0.025 *8 + 0.15)
= 1.25 – 0.85
=$ 0.4
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M
ARKETING
B
REAK
E
VEN
P
RACTICE
(SPRING
2011)
2 of 6
February 15, 2011
c)
What is the Total Break Even Unit Volume (TBEV) for Plain Oatmeal?
(Use accounting B/E)
Fixed Cost = 2 M + 0.3 M= 2.3
M
Depreciation = 17 M/10 = 1.7 M
So TBEV = ( 17M /10 +2.3 M ) / 0.4 = 10 M
d)
The manager of Quaker Oatmeal Plant wishes to make $2,000,000 in profit each year.
How
many boxes of Plain Oatmeal must they sell in order to achieve this amount of profit?
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 Fall '08
 Management, Marketing, Unit contribution, oatmeal, quaker oatmeal plant

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