Question

I need this answered with a good explanation if possible :)

3) Your company manufactures candy that sells in small bags through pharmacies like Walgreens. You sell to a wholesaler who then sells to Walgreens. Demand for your candy is 1,000,000 bags per year through Walgreens. Your manufacturing cost is $.50 per bag and Walgreens sells each bag for $2.00. Walgreens has a contribution margin of 25% and the wholesaler has a contribution margin of 20%. a. What is your selling price to the wholesaler and your contribution margin? b. If you decided to add a manufacturer coupon with a face value of $.20 and you expected a redemption rate of 1 in 10, how many additional units would you have to sell to cover the coupon next year? Would the wholesaler be willing to cover half of the cost of the coupon if the coupon was expected to increase the number of units sold next year by 100,000 additional units?

Answer 1

1. Selling Price & Contribution Margin
A	Walgreens Selling Price	2.00
B	Contribution @ 25%	0.50
C = A-B	Cost to Wallgreens/Wholesaler Selling Price	1.50
D	Contribution @ 20%	0.30
E = C-D	Cost to Wholesaler/Our Selling Price	1.20
F	Less: Manufacturing Cost	0.50
G = E-F	Contribution	0.70
I = G/E*100	Contribution Margin (%)	58.33%
2. Total Contribution at Present
	Contribution Per Unit	$0.70
	Units Sold	1,000,000
	Total Contribution	700,000
3. Contribution Per 10 Units under Coupon Option
	Particulars	Cost of 10 Units Set
A	Selling Price of 10 Units	12.00
	Less: Variable Costs
	Manufacturing Cost	5.00
	Coupon Cost	0.20
B	Total Cost of 10 Units	5.20
C = A-B	Contribution Per 10 Units	6.80
4. Addition Units to be sold next year to cover for Coupon
Set of 10 Units to be sold to make contribution of $700,000
	=700,000/$6.80
	=102,941 Sets of 10 Units
	=1,029,410 Units
Additional Units to be Sold	= 1,029,410-1,000,000
	=29,410
	Check: (Just for knowledge)
	Total Selling Price	1235292
	Less: Variable Costs
	Manufacturing Cost	514705
	Coupon Cost	20588
	Total Cost	535293
	Total Contribution	699,999
5. Would wholesaler cover half the coupon cost?
Presently earning contribution of :
	=1,000,000*$0.30
	=$300,000
If units sold increases by 100,000 Units and $0.10 per units has to be covered by Wholesaler
Units Sold	=1,100,000
Contribution Prior to Coupon Cost
	=1,100,000*$0.30
	=330,000
Coupon Cost
	=1,100,000*1/10*$0.10
	=$11,000
Net Contribution
	=330,000-11,000
	=$319,000
Additional Contribution earned if half of Coupon Cost is borne by Wholesaler
	=319,000-300,000
	=$19,000
Thus, wholesaler would be willing to cover half of the cost of the coupon as he is better off by $19,000