Question

Product X is a consumer product with a retail price of $9.95. Retailer's margins on the product are 40% and wholesaler's margins are 8% (based on the selling price). The size of the market is $300,000,000 annually (based on retail sales); product X' share (in dollars) of this market is 17.3% The fixed costs involved in manufacturing Product X are $1,400,000 and the variable costs are $0.86 per unit. The advertising budget for Product X is $2,000,000. Miscellane- ous variable costs (e.g., shipping and handling) are $0.04 per unit. Salespeople are paid entirely by a 12% commission based on the manufacturer's selling price. Product man ager's salary and expenses are $90,000 Assuming that you are the manufacturer, calculate the following: 1. What is the unit margin (contribution) for Product X (in $)? 2. What is Product X's break-even volume? 3. What market share (based on retail sales) did Product X need to break even? 4. What is Product X's (annual) net profit? 5. Calculate the increase in sales over the current volume needed to maintain the current profit level if the manufacturer doubles its advertising expenditures 6. Calculate the increase in sales over the current volume needed to maintain the current profit level if the manufacturer lowers its price by 25% Calculate the increase in sales over the current volume needed to maintain the cur- rent profit level if the manufacturer increases the sales force's commission to 15% 7. Calculations Guidelines: When solving problems Round manufacturer, wholesale, and retail prices to the second decimal point (e.g., $9.49) Round sales revenues and net income (profits) to the second decimal point (e.g., $3,625,769.64)

Answer 1

Computaton of Wholesale Price

Wholesaler price = Retail price- retailer margin

= 9.95- 40%*9.95= $5.97

Computaton of Manufacturer Price

Manufacturer price= wholesaler price- wholesaler margin

= 5.97- 8%*5.97= $5.49

Compute Variable ccost per Unit

Variable cost per unit= Manufacturing cost + Miscellaneous cost+ sales commission

=0.86+0.04+12%*5.49=$1.5588

Part-1: Margin contribution per unit= Selling price- Variable cost

= 5.49- 1.5588= $3.9312

Part-2: Break even volume = Fixed costs/ Contribution per unit

= (1400000+2000000+90000)/ 3.9312 = 887789.60 or 887770 Unt

Part-3: Market share required to break even = Break even sales in units*Retail price/ Total market

= 887770*9.95/ 300000000= 0.0294

Part-4: Present sales = 17.3%*300000000=51,900,000

Sales in units= 51,900,000/9.95= 5216080

Net Income = Contribution – Fixed costs

= 5216080*3.9312 - (1400000+2000000+90000)= $17015454