Question

Lisa, a perceptive student in the SCSU MBA program, noted the popularity of the HP-12c calculators used by students in her finance classes. She also saw that certain business school professors doggedly carried these calculators around for decades like some kind of religious talisman. She saw an opportunity and decided to start a company selling accessories that support the HP-12c lifestyle and that make the lives of HP-12c lovers more enjoyable and fulfilling.

Lisa is considering several products to include in her initial line:

Carrying case: Made from genuine leather and spandex. Comes in a variety of colors. Clips to belt or purse to keep the HP-12c always close at hand.

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.

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.

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

Strategy 1: Increasing advertising expenditures

2. 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

3. 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

4. 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

Ans	Calculation of Manufacturing price
	Final Price to cunsumer	39.99	19.995
	Retailer price (margin 50%)	26.66	59.985
	Wholeseller price (margin 12%)	23.80
	Hence Manufacturing price	$           23.80
1	Current Strategy	Rate	Unit	Total
	Sales 82000 cases @	$           23.80	82,000	$        19,51,893
	Less:
	Variable Cost	$             6.25	82,000	$          5,12,500
	Variable Cost shipping & handling	$             0.08	82,000	$                6,560
	10% Commission to sales people	$             2.38	82,000	$          1,95,189
	Total Variable Cost			$          7,14,249
	Contribution			$        12,37,644
	Contribution per unit ( 1237644 / 82000)			15.09
	Less: Fixed cost
	Product manager salary			$              65,000
	Fixed Cost			$          2,80,000
	Advertising Cost			$          3,00,000
	Total Fixed Cost			$          6,45,000
	Total Profit			$          5,92,644

2	Strategy 1: Increasing advertising expenditures to double
	Additional sales required to maintain same profit
	Additional advertising exp	$     3,00,000
	Contribution per unit	15.09
	Unit needed to sales to cover this addional cost	$         19,876
	Hence total sales volume will be	1,01,876
	(82000+19876)
3	Strategy 2: Lowering the price
	Current Strategy	Rate	Unit	Total
	Sales 82000 cases @	$           12.00	82,000	$          9,84,000
	Less:
	Variable Cost	$             6.25	82,000	$          5,12,500
	Variable Cost shipping & handling	$             0.08	82,000	$                6,560
	10% Commission to sales people	$             1.20	82,000	$              98,400
	Total Variable Cost			$          6,17,460
	Contribution			$          3,66,540
	Contribution per unit ( 366540 / 82000)			4.470
	Total Fixed Cost			$          6,45,000
	current estimated profit required			$          5,92,644
	Total value to be covered by total contribution			$        12,37,644
	Number of units need to sales to achive same profit level		2,76,878
	(1237644/ 4.47)
4	Strategy 3: Increasing the sales commission
	Total value to be covered by total contribution	1237644
	Current Strategy per unit	Rate
	Sales price	$           23.80
	Less:
	Variable Cost	$             6.25
	Variable Cost shipping & handling	$             0.08
	15% Commission to sales people	$             3.57
	Total Variable Cost	$             9.90
	Contribution per unit	$           13.90
	Total value to be covered by total contribution		1237644
	Number of units need to sales to achive same profit level		89,020
	(1237644/ 13.9)