Pricing a New Packaged Biscuit Line
Tal-Forn is a family bakery in Malta with a steady wholesale bread business and €25,000 in cash reserves. It is considering launching a 200 g pack of almond biscuits into independent grocers. The new line would add €18,000 a year in fixed costs for packaging design and a part-time production supervisor. Variable cost is €2.10 per pack, and existing equipment can handle up to 15,000 packs a year without further investment. The owner expects to sell 12,000 packs in the first year. Grocers in this category require a 35% margin on the retail price; there is no wholesaler. Competing biscuits retail between €4.50 and €6.00, with a premium imported brand at €6.20. The owner proposes a retail price of €5.20 and argues that local provenance and fresh ingredients justify a premium. The bakery has no experience in packaged retail and is cautious about tying up cash in unsold stock.
1. Calculate the price Tal-Forn would receive per pack at a €5.20 retail price, the unit contribution, and the break-even volume. Does the owner's 12,000-pack forecast clear break-even? Show your workings.
Read the worked answer
Retail price €5.20. Retailer margin = 35% of €5.20 = €1.82. Tal-Forn receives €5.20 − €1.82 = €3.38.
Unit contribution = €3.38 − €2.10 = €1.28.
Break-even volume = fixed costs ÷ unit contribution = €18,000 ÷ €1.28 = 14,062.5, so 14,063 packs.
The forecast is 12,000 packs. Total contribution = 12,000 × €1.28 = €15,360, which is €2,640 short of the €18,000 fixed cost. The plan therefore makes a first-year loss of about €2,640 before any overhead allocation. The owner's premium assumption is not enough at this margin structure. The 15,000-pack capacity is also only just above break-even, leaving little room for forecast error or returns. The recommendation must change price, margin, or fixed cost, not simply assume volume will rise.
2. The owner wants to keep the €5.20 retail price. Identify two viable changes-one on price/margin and one on cost-that could make the launch break even at 12,000 packs, and recommend which is more defensible. Justify with numbers.
Read the worked answer
Option A-price/margin: negotiate a 30% retailer margin at the same €5.20 retail. Retailer margin = €1.56; Tal-Forn receives €3.64; contribution = €1.54; break-even = €18,000 ÷ €1.54 = 11,689 packs. Alternative: raise retail to €5.55 with a 35% margin. Retailer gets €1.9425; Tal-Forn receives €3.6075; contribution €1.5075; break-even = 11,940 packs. Both clear 12,000 narrowly.
Option B-cost: cut fixed launch cost from €18,000 to €15,000. At the original €1.28 contribution, break-even = 11,719 packs; at 12,000 packs contribution is €15,360, leaving €360 surplus.
Judgement: the fixed-cost cut is less likely to damage shelf-price positioning and keeps the €5.20 price inside the €4.50–€6.00 competitive band. But €15,000 may be unrealistic if packaging design and supervision are essential. Negotiating 30% margin may be difficult with grocers. The most defensible is a combined move: reduce fixed cost to €16,000 and negotiate a 32% margin, giving manufacturer price €3.536, contribution €1.436, break-even 11,142. I would recommend testing with a lower fixed-cost launch and a 32–33% margin, with a pre-agreed volume review after six months. Do not launch on the current numbers.