Question

1. Consider Champion Manufacturing’s pricing problem for a new project: Suppose it has estimated its total fixed costs (costs of renting land, maintenance of facilities etc.) at $30,000. Its variable unit cost (costs of raw material, labor going into producing each unit of Champion’s products) is estimated to be $60 per unit.

(a) Suppose Champion estimates demand for its product to be 1000 units. It decides to implement a 5% mark-up when deciding on the price per unit of its product. Calculate the price per unit.

(b) Using the price per unit obtained in(a), derive the break-even quantity that Champion Manufacturing needs to sell. Comparing to the estimated demand in (a), would you say the mark-up that Champion used above makes the new project profitable or not?

2. Recall the steps required in calculating the total economic value of a product. Choose a product and brand that you typically purchase. Provide a list of drivers for that product that matter for you. Include both monetary and psychological drivers in that list. Next, identify a reference brand and describe your perceived points of differentiation for your chosen brand for each of the drivers you have mentioned before. Describe any advice you would provide the marketer of your chosen brand for its marketing strategy to influence your perceived benefits and perceived value of the brand.

Answer 1

Calculate the price per unit:

Add mark up to total cost of the product to get price of product.

Calculate break even point in quantity:

There is no loss or profit at break even point. To calculate break even point in quantity, contribution per unit and fixed cost are required. Fixed cost is given. But contribution per unit is not given. Hence, it should be calculated first.

Contribution per unit = Price per unit - Variable cost per unit

= $ 94.5 - $ 60

= $ 34.5

Break even in quantity = Fixed cost/Contribution per unit

= $ 30,000 / $ 34.5

= 870 units (approximately)

Company's estimated demand is more than the break even point in quantity. Hence, at 1000 units, company will get any profit.

Calculate the profit for the company: