Question

Lisa, a perceptive student in the SCSU MBA program, noted the popularity of the HP-12c calculators used by students in her finance classes. She also saw that certain business school professors doggedly carried these calculators around for decades like some kind of religious talisman. She saw an opportunity and decided to start a company selling accessories that support the HP-12c lifestyle and that make the lives of HP-12c lovers more enjoyable and fulfilling. Lisa is considering several products to include in her initial line: Carrying case: Made from genuine leather and spandex. Comes in a variety of colors. Clips to belt or purse to keep the HP-12c always close at hand. The carrying case would be sold to the end consumer for $39.99. Lisa will not sell directly to the consumer, but will use a wholesaler who will sell to a retailer (e.g., university book stores). The retailer’s margin is 50% and the wholesaler’s margin is 12%. The fixed cost involved in manufacturing the cases is $280,000 and the variable costs are $6.25 per case. Lisa is considering an advertising budget of $300,000. Miscellaneous variable costs (e.g., shipping and handling) paid by Lisa’s company come to $0.08 per case. Lisa has decided to use sales people to encourage adoption by wholesalers, and the sales people will be paid entirely by a 10% commission on the manufacturer’s (i.e., Lisa’s) selling price. The product manager’s salary is $65,000.

After conducting an extensive market-sizing study, Lisa’s best guess is that she is likely to sell 82,000 cases her first year. This projection is based on the price, advertising and sales support listed above. Lisa is considering several possible changes to her marketing plan to try and increase her sales over the 82,000 baseline.

Part 1: How much profit will Lisa’s company earn if she sells 82,000 cases? 134820

Strategy 1: Increasing advertising expenditures

1. Calculate the total sales volume (in units) needed to maintain the current estimated profit (#4) if Lisa doubles her advertising budget.

Strategy 2: Lowering the price

2. Calculate the total sales volume (in units) needed to maintain the current estimated profit (#4) if Lisa lowers the price to the wholesalers to $12.00.

Strategy 3: Increasing the sales commission

3. Calculate the total sales volume (in units) needed to maintain the current estimated profit (#4) if Lisa increases the sales force’s commission to 15%.

Answer 1

Calculation of Profit if Lisa sell 82000 Cases
Particulars	Rate	Qty	Sale Amount
Total Sales	$23.80	82000	$1,951,893
Direct Expenses:
Fixed Manufacturing Cost			-$280,000
Varriable Cost	$6.25	82000	-$512,500
Misc. Expenses	$0.08	82000	-$6,560
Indirect Expenses:
Advertisement Expenses			-$300,000
Commission to Sales Man			-$195,189
Salary of Product Manager			-$65,000
	Profit		$592,644

Straregy-1 Increasing advertising expenditures

Calculate the total sales volume (in units) needed to maintain the current estimated profit (#4) if Lisa doubles her advertising budget.

Calculation of Profit if Lisa sell 101876 Cases
Particulars	Rate	Qty	Sale Amount
Total Sales	$23.80	101876	$2,425,013
Direct Expenses:
Fixed Manufacturing Cost			-$280,000
Varriable Cost	$6.25	101876	-$636,725
Misc. Expenses	$0.08	101876	-$8,150
Indirect Expenses:
Advertisement Expenses			-$600,000
Commission to Sales Man@10%			-$242,501
Salary of Product Manager			-$65,000
	Profit		$592,636

Strategy 2: Lowering the price

2. Calculate the total sales volume (in units) needed to maintain the current estimated profit (#4) if Lisa lowers the price to the wholesalers to $12.00.

Calculation of Profit if Lisa sell 276880 Cases
Particulars	Rate	Qty	Sale Amount
Total Sales	$12.00	276880	$3,322,560
Direct Expenses:
Fixed Manufacturing Cost			-$280,000
Varriable Cost	$6.25	276880	-$1,730,500
Misc. Expenses	$0.08	276880	-$22,150
Indirect Expenses:
Advertisement Expenses			-$300,000
Commission to Sales Man@10%			-$332,256
Salary of Product Manager			-$65,000
	Profit		$592,654

Strategy 3: Increasing the sales commission

3. Calculate the total sales volume (in units) needed to maintain the current estimated profit (#4) if Lisa increases the sales force’s commission to 15%.

Calculation of Profit if Lisa sell 89020 Cases
Particulars	Rate	Qty	Sale Amount
Total Sales	$23.80	89020	$2,118,994
Direct Expenses:
Fixed Manufacturing Cost			-$280,000
Varriable Cost	$6.25	89020	-$556,375
Misc. Expenses	$0.08	89020	-$7,122
Indirect Expenses:
Advertisement Expenses			-$300,000
Commission to Sales Man@15%			-$317,849
Salary of Product Manager			-$65,000
	Profit		$592,648