Lerato's Ginger Juice
Lerato has started a business making bottled ginger and lemon juice in Maun. She produces 600 bottles a month at a total cost of P7,200. Of this, P3,000 is fixed cost for rent and licence, and P4,200 is variable cost for materials and bottles, or P7 a bottle. Competitors sell similar 500 ml bottles for P20. Lerato charges P15 and sells about 350 bottles a month, mostly to friends and one small café. She spends P500 a month on Facebook posts and gives free samples at the market. A supermarket chain agrees to stock her juice but demands a 25% trade discount and payment 60 days after delivery. Lerato wants to double sales within six months but has only P4,000 for marketing. Her bottles are plain, and customers often ask whether the juice is 'healthy' or 'natural'.
1. Calculate Lerato's current monthly profit or loss, contribution per bottle, and break-even point. Comment on her position.
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Current position
Revenue = 350 x P15 = P5,250. Variable cost = 350 x P7 = P2,450. Fixed cost = P3,000. Total cost = P5,450. Loss = P5,250 - P5,450 = P200.
Contribution and break-even
Contribution per bottle = P15 - P7 = P8. Break-even = fixed cost / contribution = P3,000 / P8 = 375 bottles.
Current sales of 350 bottles are 25 bottles below break-even. Lerato is making a small loss, not a profit. The business has a positive contribution, so extra sales help, but she must sell at least 375 bottles a month to cover fixed costs. Her P4,000 marketing budget is limited. Spending it on broad awareness without fixing the plain label and distribution may not close the gap. She needs about 7% more sales just to break even, and more than that to earn a profit.
2. Evaluate the supermarket chain's offer. Should Lerato accept it?
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Price after the 25% trade discount = P15 x 0.75 = P11.25. Contribution = P11.25 - P7 = P4.25 per bottle.
This is positive, so each bottle sold through the supermarket adds P4.25 toward fixed costs. But it is much less than the P8 from direct sales. Break-even with supermarket sales only = P3,000 / P4.25 = 706 bottles. The chain must order well above that for the deal to be worthwhile.
Cash-flow risk: payment after 60 days means Lerato pays for materials and bottles before receiving cash. If the chain orders 600 bottles, variable costs alone are P4,200, plus fixed costs. She may not have the cash.
Benefits: volume, brand exposure and a credible customer. Risks: lower margin, dependence, returns, late payment and pressure to cut the price further.
Judgement: she should not accept on the current terms. Negotiate a smaller trial order, 30-day payment, a lower discount such as 15%, or a deposit. Accept only if she can fund the first order and the volume keeps her above break-even.
3. Recommend how Lerato should use the P4,000 marketing budget over six months. Justify your choices.
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Priority 1: Fix the label first (P800-P1,000). Include a clear name, ingredients, volume, contact details and a 'natural' claim only if it is true. Customers are already asking; the label is the cheapest salesperson.
Priority 2: Target local cafés, lodges and safari camps (P1,000). Use samples and visits. These buyers order in larger quantities and give repeat business. Maun's tourism market values local products.
Priority 3: Sampling at the market and one or two events (P800). Let people taste the juice. Word of mouth is strong for food.
Priority 4: Social media with a clear offer (P600). Use short videos, customer photos and a 'find us at' list. Avoid boosting posts without a call to action.
Priority 5: Keep P600 as a contingency for a small promotion or delivery.
Do not spend everything on a radio advert or billboard; the audience is too broad for P4,000. Measure new stockists, repeat orders and cost per new customer. If direct sales reach 375 bottles or more, the business covers its fixed costs.