Santa Lucia Wholefoods: Product development decisions
BY ELIZABETH GUNNER
Santa Lucia Wholefoods has been making dried pasta for over 15 years. They have always produced and sold just one product line:Â a standard dried pasta distributed at supermarkets in a range of shapes. Now, the company directors have decided to invest in producing a second product line so that they can increase company proâ€‘ts. The product development team are considering two options for the new line:Â luxury pastas or gluten-free pastas.
Currently, Santa Lucia Wholefoods sells 900,000 units of standard pasta annually at $2.10 per pack. It is predicted that if they produced a luxury brand they would sell 500,000 units of it each year (at $4.60 per pack); if they produced a gluten-free brand they would sell 750,000 units (at $3.75 per pack). The variable costs per unit are $0.70 for standard pasta, $1.70 for luxury pasta and $1.50 for gluten-free pasta. The annual â€‘xed costs for the company are $1,500,000.
1 Divide the list below into â€‘fixed and variable costs:
a. four for making the pasta
b. rental of the factory
c. wages for employees
d. eggs for making the pasta
e. machinery within the factory
f. packaging for the products
g. maintenance on machinery
h. advertising expenses.
2. Assuming that Santa Lucia Wholefoods achieves the predicted sales targets, what would the â€‘fixed cost allocation per unit be if they produced standard pasta and luxury pasta (scenario A)? What would the â€‘fixed cost allocation per unit be if they chose the gluten-free pasta instead of the luxury pasta (scenario B)? (Note:Â Fixed costs should be allocated evenly for all pasta units sold.)
3. Calculate the sales revenue for both products in both scenarios.
4. Which scenario would give a greater total proâ€‘t for the â€‘firm?
5. For both scenarios, calculate the proâ€‘t margin for each product.