Creative Solutions, Inc. has a successful brand with the name Top Goal. The mark

Question

Creative Solutions, Inc. has a successful brand with the name Top Goal. The market size in which Top Goal competes is $2 billion, and Top Goal has generated sales of $150 million. It has a contribution margin of 30%. Creative Solutions is thinking of introducing a new brand under the name of Peak Goal. Peak Goal will compete in the same market as Top Goal. The budget to launch this brand is expected to be $20 million. If it is launched, Peak Goal will capture 10% of the market. It has a contribution margin of 40%. Half of the sales of Peak Goal will be cannibalized from the sales of Top Goal. An alternative strategy for Creative Solutions is to cancel the introduction of Peak Goal and instead to spend the $20 million to promote Top Goal. This action is expected to double the sales for Top Goal. Both brands (Top Goal and Peak Goal) would sell at the same price. Where should the company spend the $20 million and why?

Explanation / Answer

OPTION 1 OPTION 2 OPTION 3 Top Goal Top Goal Peak Goal Top Goal Sales 150 75 200 300 Contribution % 30% 30% 40% 30%                    Value 45 22.5 80 90 Less: Fixed costs 20 20 Net Income 45 22.5 60 70 82.5 The company should spend the $20 million in launching Peak Goal as it gives Maximum contribution & maximum income.

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