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Scenario 16-7 Consider the Problem Facing Two Firms, YumYum and Bertollini, in Bertollini

question 547

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Scenario 16-7
Consider the problem facing two firms, YumYum and Bertollini, in the frozen food market. Each firm has just come up with an idea for a new "frozen meal for two" which it would sell for $9. Assume that the marginal cost for each new product is a constant $2, and the only fixed cost is for advertising. Each company knows that if it spends $12 million on advertising it will get 1.5 million consumers to try its new product. YumYum has done market research which suggests that its product does not have any "staying" power in the market. Even though it could get 1.5 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future. Bertollini's market research suggests that its product is very good, and consumers who try the product will continue to be consumers over the ensuing year. On the basis of its market research, Bertollini estimates that its initial 1.5 million customers will buy one unit of the product each month in the coming year, for a total of 18 million units.
-Refer to Scenario 16-7. Suppose YumYum has an opportunity to create a cheaper advertising campaign in newspapers rather than on television for its new product. This campaign will cost $8 million and is expected to result in the same 1.5 million one-time customers. YumYum should

Definitions:

Goodwill Recognition

The accounting process of recording the value of intangible assets acquired through a business combination.

Pooling of Interest

An accounting method for mergers and acquisitions where the assets and liabilities of the combining companies are aggregated.

Synergy

The benefit that results when two or more agents work together to achieve something neither could have achieved on their own.

Incremental Net Gain

The increase in net profit resulting from a specific action, taking into account all associated costs and revenues.