1. Critical Loss Analysis Energy Drinks are NOT a Relevant Product

2. The Loss vs. The Gain The Two Effects of Raising Price: a. Loss in  from losing energy drink sales that earned positive margins a. Loss in  from losing energy drink sales that earned positive margins b. Gain in  from higher prices on energy drink sales that still get made b. Gain in  from higher prices on energy drink sales that still get made “Critical Loss” is the amount of lost sales required for a net reduction in profits.

3. MC P today P new = (1.05)* P today Gain in  Loss in  Critical Loss Graphically Price, Cost QuantityQ today D Q new

4.  Pre-merger margins on retail sales of energy drinks are approximately 50% (see Appendix 1).  Losing only 10% of these sales means that a 5% price increase is unprofitable (see Appendix 2).  Therefore, Critical Loss is about 10% of sales. Energy Drinks Critical Loss

5. Energy Drinks A Market?  Will actual loss in sales resulting from price increase be greater than critical loss (I.e., 10%) in sales?  If yes, not a market.  If no, a market.

6. Energy Drinks Actual Loss  Actual loss would be greater than 10%  86% buyers first time users, 76% of that from soft drinks – no loyalty  Energy drink demand elasticity = -5.75  Fast growth suggests fast decline possible  Conclusion: energy drinks not a relevant market.

7. Appendix 1 Chief Variable Costs of Manufacturing and Selling energy drinks are Raw Inputs, Labor, Energy, Packaging Chief Variable Costs of Manufacturing and Selling energy drinks are Raw Inputs, Labor, Energy, Packaging Total Revenue/Total Quantity (Average Revenue) is roughly 2 per half-litre Total Revenue/Total Quantity (Average Revenue) is roughly 2 per half-litre Total Variable Costs/Total Quantity (Average Variable Cost) is roughly 1 per half-litre Total Variable Costs/Total Quantity (Average Variable Cost) is roughly 1 per half-litre Margin = (P-C)/P = (2-1)/2 =.5 or 50% Margin = (P-C)/P = (2-1)/2 =.5 or 50%

8. Appendix 2 The Critical Sales Loss is < 10% Raise the price of energy drinks 5% Raise the price of energy drinks 5% If the loss is (.1Q) x (.5) [losing 10% of sales that had earned a 50% margin], then If the loss is (.1Q) x (.5) [losing 10% of sales that had earned a 50% margin], then Then gain is (.9Q) x (.05) [keeping 90% of sales and earning an extra 5% on each] Then gain is (.9Q) x (.05) [keeping 90% of sales and earning an extra 5% on each] Loss is.05 Q > Gain is.045 Q Loss is.05 Q > Gain is.045 Q Conclusion: Critical Loss is about 10% Conclusion: Critical Loss is about 10%