Question

Frito-Lay purchases a case of potato chip’s worth of inputs for $500. It has annual fixed costs of $2,000,000. It applies a margin of 30% when selling the case of potato chips to a wholesaler. The wholesale charges a 15% mark-up to the retailer. The retailer then sells to the final consumer at an additional margin of 15%. In total, Frito-Lay is able to sell 500,000 cases a year.

Calculate Frito-Lays unit contribution?

What is the final price paid by the consumer for a case of chips?

Answer 1

unit contribution = selling price per case (to the wholesaler) - variable cost per case

selling price per case = (purchase cost + (annual fixed costs / number of cases per year)) * (1 + Fritolay margin %)

selling price per case = ($500 + ($2,000,000 / 500,000)) * (1 +30%) = $655.20

unit contribution = $655.20- $500 = $155.20

Final price paid by consumer = selling price per case (to the wholesaler) * (1 + wholesaler margin %) * (1 + retailer margin %)

Final price paid by consumer = $655.20 * (1 + 15%) * (1 + 15%)

Final price paid by consumer = $866.50 (per case)