Question

The product manager for Company XYZ (the manufacturer) was preparing a new product analysis to evaluate its profitability. On the basis of extensive consumer research, he had decided to sell the product at $25 retail. In this market, retailers expected a 30% margin on cost (there is no wholesaler). Brand XYZ’s variable costs are $12.50 per unit, and the total fixed costs are estimated to be $100,000.  The forecasted sales volume for the item at this $25 retail price is 20,000 units.

1. Will the product make a profit with this planned selling price? If YES, how much? If NO, how much of a loss would there be?  

b. In year 2, the company plans to introduce a second product ABC in a completely different market to prevent cannibalization. Product ABC has a unit contribution of $6.85. The brand manager thinks that they will be able to sell 4,500 units in the first quarter. Unit sales are forecasted to increase 10% every subsequent quarter. The company has invested $50,000 in R&D for the product as well as $45,000 in marketing for the launch. What is the Year #1 ROMI for this new product initiative?

Answer 1

Ans:

A.

Sales Units : 20,000

Selling price : $25

Variable costs : $12.5

Contribution margin : $25 - $12.5 = $12.5

Gross profit : 20,000 * $12.5 = $250,000

Fixed costs : $100,000

Profit = $250,000 - $100,000 = $150,000

So yes with a profit of $150,000.

B.

ROMI = Incremental Gross profit / Marketing Investments :

Sales for the year :

Quarter 1 : 4,500 Units

Quarter 2 : 4,500*110% = 4,950 Units

Quarter 3 : 4,950*110% = 5,445 Units

Quarter 4 : 5,445*110% = 5,990 Units

Total : 20,885 units

Without marketing : 4,500 * 4 = 18,000

Incremental Contribution : (20,885-18,000) * $6.85 = $19,762

ROMI = $19,762 / $45,000 = 43.92%

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