Question

5. As product manager for electric can openers you are developing an understanding of the financial situation of your product. Your assistant has given you the following information: Retail selling price Retail margin Wholesale margin Direct factory labour Raw materials All overheads Sales commissions Sales force travel costs Advertising Total market size Current yearly sales of your brand $35 35% 20% $3/unit $1.50/unit $100,000 10% of mfr.'s selling price $200,000 $500,000 1 million units 220,000 units Calculate the following: (a) contribution per unit for your opener, (b) break-even volume in units, (c) current total contribution, (d) current before-tax profit, and (e) market share to contribute before-tax profit of $3 million. 6. Bob Allison imports roses from California for direct distribution to customers in Ottawa. Five sales people sell the roses to shoppers in malls on Thursdays, Fridays, and Saturdays and receive 10 per cent of the $2 selling price. Each rose costs $0.35 from the supplier. Air freight costs $0.15 a rose, while customs duty costs $0.15 a rose. Provincial tax laws require that seven per cent of the selling price be remitted to the government. Mr. Allison absorbs this cost rather than passing it onto his customers. Fifteen per cent of the roses received are damaged and thus cannot be sold. Other expenses include $325 for the sales manager's weekly salary, $500 a week for promotion (newspaper ads and posters) and $100 a week for gas and maintenance on the company car. The automobile has just been purchased for $9,360 and it is expected to last three years. For accounting purposes, Mr. Allison uses straight-line depreciation method. Mr. Allison, who earns $30,000 a year, spends 20 per cent of his time with the rose project and he allocates this cost accordingly to that project. He hopes the company can earn $1.000 a week before tax. He wonders how many roses he must sell to break even, how many to make the $1,000 profit, and how many to order if he expects to sell at that profit target level. (Use a 52-week year).

Answer 1

Electric Can Requirement a If percentage of selling price Retail price = $35.00 Retail margin (-35)(35) = 12.25 Retail cost = 22.75 Wholesale margin (-20) (22.75) 4.55 Wholesale cost 18.2 Less: Manuf. price Variable Costs Labor Raw Materials 1.5 Commission (10% of $18.2) 1.82 Contribution Margin 11.88 Requirement b Break-even Volume = FC/CM = $800,000/$11.88 = $67,340 units Requirement Total Contribution Unit CM X Units Sold = $11.88 x 220,000 = $2,613,600 Requirement d Before Tax Profit = Total Contribution - Fixed Costs = $2,613,600 - $800,000 = $1,813,600 Requiremente (Profit + Fixed Costs)/CM = Breakeven for that profit level $3,800,000/11.88 = 319,865 units 319,865 units / 1 million = 31.99% share