Question

2. The manufacturer of Aromello, a new body lotion, sells it directly to retailers who take a 40% margin. The retail price of Aromello is $5 per bottle. Industry sales for Aromello and other products of its type are 25 million units annually; Aromello has 20% of the market. The manufacturer’s fixed costs, including all expenses but advertising, amount to $3 million per year. The annual advertising budget is $2 million. The raw materials of each bottle of Aromello cost 50 cents, while packaging, bottling, and all other variable costs (including shipping, breakage, insurance…) are another 50 cents. a. What is the unit margin of Aromello for the manufacturer? b. What is the break-even volume? c. What is the current volume of Aromello given its market share?

Answer 1

a. Less Retail price retailers margin (40%) Manufacturers Selling Price $ 5.00 2.00 3.00 s $ Add Raw material per bottle Other Variable cost per bottle Variable expense per unit $ 0.50 0.50 1.00 Less Selling Price Per unit Variable Expense Per unit Contribution Margin Per unit $ $ 3.00 1.00 2.00 b. Add Advertising expense Other Fixed cost Total Fixed Cost $ $ $ 2,000,000 3,000,000 5,000,000 Total Fixed Expense Contribution Margin Per unit Total Breakeven Point in units $ $ Divide 5,000,000 2.00 2500000 Units C. Industry Sales Multiply Aromello Share % Aromello Share in units 25000000 20% 5000000 units