Hockley Brewing has produced a new craft lager beer that will be branded Hockley Classic Lager. The market for craft beer is about $20 million retail per year and the average retail price across all craft beer producers is $2.50. The following information applies to Hockley’s new craft lager beer. Factory production costs $1.05 / can (Variable Cost)
Beer ingredients $0.35 / can (Variable Cost)
Packaging $0.20 / can (Variable Cost)
Advertising and promotion $60,000 (Fixed Cost)
Channel listing fees $30,000 (Fixed Cost)
Hockley’s wholesale price to retailers $2.40 / can (Variable Cost)
(Hockley’s) manufacturer’s suggested retail price $2.55 / can (Variable Cost)

a. What is Hockley’s unit contribution (measured in $ per can) and contribution margin (measured in percentage)?

b. What is the break-even point in cans? in dollars?

c. What is the necessary sales volume in cans to achieve a $150,000 (target) profit?

d. What will Hockley’s net profit be if 100,000 cans of the new lager are sold?

e. What will Hockley’s market share of craft beer be if they sell 100,000 cans? [Hint: to calculate the total number of cans sold in the market, use the total retail value of the market and industry average retail price given above.]

f. Their largest competitor is Mill Street Brewery whose Original Organic Lager has 2.5% market share of the craft beer market. Given Hockley’s market share calculated in part (e), what will Hockley’s relative market share (RMS) be for their Classic Lager?

g. The craft beer market is growing at 10% annually, higher than any other type of beer. With the RMS for Hockley Classic Lager calculated in part

(f), at the end of their first year, where in Hockley’s portfolio will Classic Lager be positioned and what recommendation would follow?

h. Calculate the price elasticity of demand if they raise the MSRP from $2.55 to $2.75 and demand falls from 100,000 cans to 95,000 cans. Is demand for this product price elastic or inelastic?