Question

Mettel Products sells 100,000 flash drives annually to industrial distributors who resell the drives to business customers for $40 each. The distributors’ margins are 25%. Mettel Products’ cost of goods sold is $10.00 each. Mettel’s total variable costs (including selling costs) are $15.00 per drive. What is the gross margin (in percentage) enjoyed by Mettel Products on its drives? [Note: A firm’s margin on a product is typically calculated as a percentage of the firm’s selling price.]

Mettel has developed a new flash drive for household use. The new drives’ cost of goods sold is $3 each, and its total variable costs are expected to be $7.00 each. If it were to market the new drive, it believes it could sell 40,000 units annually to electronics stores at $13 each. Although Mettel expects the electronics stores would resell the new flash drives primarily to households, 30% of the electronics stores’ sales (in units) are likely to be to business customers who would stop purchasing Mattel drives from industrial distributors (and purchase them from electronics stores instead). Would you advise Mettel to sell the new flash drives to electronics stores? Why or why not?

Answer 1

Part A

Resell price of industrial distributors	$                40
Multiply: distributors’ margins	25%
Gross Margin of industrial distributors	$                10
Resell price of industrial distributors	$                40
Gross Margin of industrial distributors	$                10
Purchase price of industrial distributors or Selling price of Manufacturer	$                30
Selling price of Manufacturer	$                30
Less: cost of goods sold	$                10
Gross profit	$                20
Gross profit	$                20
Divided by: selling price of Manufacturer	$                30
Gross margin (in percentage) enjoyed by Mettel Products on its drives	66.67%

Part B

	Mettel drive	New drive
Selling price per unit	$                30	$              13
Less: Variable cost per unit	$                15	$                7
Contribution margin per unit	$                15	$                6
30% of the electronics stores’ sales (in units) are likely to be to business customers who would stop purchasing Mattel drives from industrial distributors.
Lost of Mettel drive sales in units (100000*30%)		30,000
Multiply: Contribution margin per unit for Mettel drive		$              15
Contribution margin lost due to lost of metal drive sales		$   450,000
Units sold to electronics stores		40,000
Multiply: Contribution margin per unit for new drive		$                6
Increase in contrition margin due to sales of new drive		$   240,000
Increase in contrition margin due to sales of new drive		$   240,000
Less: Contribution margin lost due to lost of metal drive sales		$   450,000
(Decrease) in net income		$ (210,000)
The company should not sell the new flash drives to electronics stores.		NO
Because of net income will be decreased by $210,000 if the company sells the new flash drives to electronics stores.