Working Towards a Final Price

Paradise Kitchens, Inc. was started by cofounders Randall F. Peters and Leah E. Peters to develop and market Howlin' Coyote Chili, a unique line of single serve and microwavable Southwestern/Mexican style frozen chili products. The Howlin' Coyote line of chili was first introduced in the Minneapolis-St. Paul market. Two years later, it expanded to Denver, and two years after that, it spread to Phoenix.

To the company's knowledge, Howlin' Coyote is the only premium-quality authentic Southwestern/Mexican style frozen chili sold in grocery stores. Its high quality has gained fast, widespread acceptance in these markets. Paradise Kitchens attributes the success of the Howlin' Coyote line in part to the rapidly growing Hispanic market. The company believes that the Howlin' Coyote brand can be extended to other categories of Southwestern/Mexican food products such as tacos, enchiladas, and burritos.

Paradise Kitchens believes its high-quality, high-price pricing strategy has proven to be successful for the Howlin' Coyote line of frozen dinners. Since the Howlin' Coyote line of Southwestern/Mexican foods has successfully expanded into 15 markets across the United States, Paradise Kitchens is currently drafting a marketing plan to support their newest product line extension, Earth Coyote Organics (ECO), an extension of the Howlin' Coyote line with a focus on organic ingredients and earth-friendly marketing.

Marketing managers often employ an approach that considers cost, volume, and profit relationships based on the profit equation. Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output. The break-even point (BEP) is the quantity at which total revenue and total cost are equal.

While completing this activity, please refer to Appendix A in your textbook for additional information on Paradise Kitchens and Building an Effective Marketing Plan.

Read the case below and answer the questions that follow.

The owners of Paradise Kitchens have created four new products in its test kitchens for the Earth Coyote Organics frozen dinner line: Organic Chili, Organic Burritos, Organic Enchiladas, and Organic Burrito Bowls. The recipes have been created with certified organic ingredients and have been taste tested during the product development process. The market research subjects were enthusiastic about the quality and perceived healthfulness of the new frozen dinners. Paradise Kitchens is optimistic about the product launch of its new line and now faces the task of choosing a price for the ECO line. Because costs were so similar across all four products and to keep pricing simple, Paradise Kitchens plans on setting one price for all four of its new Earth Coyote Organics products.

To initiate the pricing decision, the owners of Paradise Kitchens did some benchmarking on the pricing of the competitions' products. They found that prices in the frozen dinner category varied widely from $1.75 for a Lean Cuisine frozen meal to $4.89 for an Organics Classics frozen meal. Paradise Kitchens also conducted market research to estimate the demand for the Earth Coyote Organics product at various price points. Specifically, Paradise Kitchens tested three price points: $7.00 per meal, $5.50 per meal, and $4.00 per meal. Paradise Kitchens determined that most consumers would not be willing to pay $7.00 for a frozen dinner. However, Paradise Kitchens found out that market demand at the $5.50 price point would be 125,000 meals and at the $4.00 price point would be 225,000 meals.

Paradise Kitchens estimates that its expenses for the mortgage, salaries, and insurance for the ECO line will be approximately $250,000 annually. Additionally, Paradise Kitchens believes that the direct labor and materials used in creating each ECO frozen dinner will be $2.75.

With an understanding of the overall pricing strategy for the Howlin' Coyote line and the expenses related to the Earth Coyote Organics line, the owners now are able to calculate break-even points for both products and estimate revenue levels for each potential price point to aid them in their pricing decision.

1. The break-even amount at the $5.50 price point is _______ meals.

102,290

83, 333

90,909

2. The break-even amount at the $4.00 price point is approximately _______ meals.

207,000

175,000

200,000

3. To signal the high quality and exclusivity of its Earth Coyote Organics line, Paradise Kitchens should use a _______ pricing policy.

cost-plus

prestige

penetration

4. The total profit to the firm with a $5.50 price point would be

$343,750

$687,000

$93,750

5. The total profit to the firm with a $4.00 price point would be:

$31,250

$281,250

$93,750