Question

The previous questions:

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.

1. What is the price the manufacturer (Lisa’s company) charges the wholesaler?
2. What is the manufacturer’s (Lisa’s) unit margin (contribution/profit per unit excluding fixed costs) for the cases (in $)?
3. How many units must be sold to turn a profit?

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.

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

Strategy 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.

Strategy 2: Lowering the price. 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. 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

Answer is given below with working

working notes: End Consumer price Price charged by wholesaler to Retailer $39.99 $20.00 50% of End consumer price a) Price charged by Lisa to Wholesaler $17.60 ($20*88%) Variable Cost Variable manufacturing cost Shipping and handling Commission - 10% Total Variable cost Per Case $6.25 $0.08 $1.76 $8.09 b) Selling price charged by Lisa Less: Variable cost Contribution per unit $17.60 $8.09) $9.51 A Break even point Fixed Cost Contribution per unit $645,000 $9.51 852 Sales in excess of 67,852 units will generate profit to Lisa 82,000 A $9.51 B $779,820 AXB Profit if 82,000 cases are sold Total unit sold Contribution per unit Total Contribution Less: Fixed Cost Manufacturing cost Advertising cost Product manager salary Total Fixed cost Net Profit $280,000 $300,000 $65,000 $645,000 $134,820 Contribution - Fixed Cost Strategy 1 Total existing Fixed cost Increase in Advertising cost Profit Total target $645,000 $300,000 $134,820 $1,079,820 Units Total target Contribution per unit $1,079,820 $9.51) 113,546 Strategy 2 $12.00 $1.44 $10.56 $6.25 Price to wholesaler Less: Margin at 12% Net Price to Lisa Variable manufacturing cost Shipping and handling Commission - 10% Total Variable cost Revised Contribution per unit $0.08 $1.06 $7.39 $3.17 Total existing Fixed cost Profit Total target $645,000 $134,820 $779,820 Units Total target Contribution per unit $779,820 $3.17 245,690 Strategy 3 $17.60 Price to wholesaler Variable manufacturing cost Shipping and handling Commission - 15% Total Variable cost Revised Contribution per unit $6.25 $0.08 $2.64 $8.97 $8.63| Total existing Fixed cost Profit Total target $645,000 $134,820 $779,820 Units Total target Contribution per unit $779,820 $8.63 90,401