Question

	Dress shirt product lines
	Classic	Premium	Executive
Retail SP	$    75.00	$    95.00	$ 125.00
% of Total Sales	14%	7%	14%
Tailoring Costs	$    12.00	$    16.00	$    18.00
Shipping Costs	$    35.00	$    40.00	$    45.00
	Suit product lines
	Coat	Classic	Premium	Executive
Retail SP	$ 395.00	$ 475.00	$ 625.00	$ 850.00
% of Total Sales	20%	12%	13%	20%
Tailoring Costs	$    55.00	$ 115.00	$ 125.00	$ 135.00
Shipping Costs	$ 200.00	$ 210.00	$ 215.00	$ 220.00

1) Based on total revenues of $600,000, what are the expected sales and total contribution margins for each product?

2) Assume Style Inc. decided to drop the product line with the lowest total contribution margin. Further, assume they decided to try and offset the lost profits from the dropped line by spending an additional $5,000 in advertising.
a.How much additional sales revenue would Style Inc. need to generate in order to recover the profits from the dropped line, and the increased advertising costs.
[Hint – You need to utilize the WACMR, however, dropping a product line changes the sales mix, total revenues, total contribution margin, and WACMR.]

b.   How much of a percentage increase in sales would this equate to? Do you think this increase is realistic? Why/why not?

Answer 1

1			Dress Shirt			Suit product
			Classic	Premium	Executive	Coat	Classic	Premium	Executive	Total
A	Retail SP	$	75	90	125	395	475	625	850
B	% of Total Sales	%	14	7	14	20	12	13	20	100
C	Total Sales Rev. (Expected sales of Each Product) ($600000*B%)	$600000	84000	42000	84000	120000	72000	78000	120000	600000
D	No of Unit produce (A/C)		1,120	467	672	304	152	125	141
E	Tailoring Costs	$	12	16	18	55	115	125	135
F	Shippping Costs	$	35	40	45	200	210	215	220
G	Tailoring Costs + Shipping Cost per unit (E`+F)	$	47	56	63	255	325	340	355	1441
H	Total Cost (G*D)	$	52,640	26,133	42,336	77,468	49,263	42,432	50,118	3,40,390
I	Profit (C-H)	$	31,360	15,867	41,664	42,532	22,737	35,568	69,882
J	Contribution Margin of Each product (I/C)%	%	37.33	37.78	49.60	35.44	31.58	45.60	58.24
	If style inc decied to drop the lowest profit margin then they will drop Suit Classic Product which margin is 31.58% only
	So the they need to recover the profit of $15867 and additoinal expesnes of advertising $5000
	So the total profit need to increase by $15867+$5000=$20867
	Profit Per unit		28.00	34.00	62.00	140.00		285.00	495.00	1,044.00
	Sales Mix		1,120	467	672	304		125	141	2,828
	Contribution Margin		31,360	15,867	41,664	42,532		35,568	69,882	2,36,873
			WACMR	236873/2828=83.75 or 84
			Profit need to increasee	20867/84
			No of units need to increase	248