Question

Vanessa Pareja has just become a product manager for Brand X as a toy manufacturer. Brand X is a product with a retail price of $1.00. Retail Margins on the product are $0.35 while wholesalers take a 12% margin. Brand X and its direct competitors sell a total of 20 million units annually. Brand X has 24% of this market. Variable manufacturing costs for Brand X are $0.09 per unit. Fixed manufacturing costs are $900,000. The advertising budget for Brand X is $500,000. The brand X product manager’s salary and expenses total $35,000. Salespeople are paid entirely by a 10% commission (out of manufacturer price to wholesaler). Shipping costs, breakage, insurance, and so forth are $0.02 per unit. Please answer

1a. What is the manufacturer’s selling price to the wholesaler?

1b. What is the per unit total variable cost for Brand X?

1c. What is the total fixed cost for Brand X? 1d. What is the unit contribution for Brand X?

1e. What is brand X’s break-even point in units?

2 Question 2 (15/60) The industry demand is expected to increase to 23 million units next year. Ms. Pareja is considering raising her advertising budget to $1 million. Use this information to answer Question 2.

2a. If the advertising budget is raised, how many units will Brand X have to sell to break even?

2b. How many units will Brand X have to sell in order to achieve the same profit that it did this year?

2c. What will be Brand X’s market share have to be next year for the same target profit as this year?

3 Question 3 (15/60) Upon reflection, Ms. Pareja decides not to increase Brand X’s advertising budget. Instead, she thinks she might give retailers an incentive to promote Brand X by raising their margins from $0.35 to $0.40. The margin increase would be accomplished by lowering the price of the product to retailers. Wholesaler margins would remain at 12%. Use this information to answer Question 3.

3a. If retailer margins are raised to $0.40 next year, how many units will Brand X have to sell to break even?

3b. How many units will Brand X have to sell to achieve the same profit next year as it did this year?

3c. What would Brand X’s market share have to be for its profit impact to remain at this year’s level?

4 Question 4 (20/60) The Parkers Barber is considering opening a new high-end barber shop. The new shop will cost them $150,000 in infrastructure, equipment, rent and salary. Parkers think that there will be a 25% chance of “prospering local economy” that leads to $350,000 revenue, a 35% chance of “moderate local economy” that leads to $210,000 revenue and a 40% chance of “mediocre local economy” that leads to $80,000 in revenue. Assume if the Parkers Barber does not expand, there is no impact on revenue. Due to the uncertainty, Parkers Barber is planning to conduct a market analysis to identify the local economy. For market research that can predict local economy precisely, what is the maximum price that the Parkers Barber is willing to pay?

Answer 1

1a. Calculation of Manaufacturer's selling price to Wholeseller:

Selling price per unit	$1.00
Less: Margin @ 12%	$0.12
Price to wholeseller	$0.88

1b. Calculation of Per unit variable cost:

Manufacturing cost per unit	$0.09
Add: Shipping cost, breakage and insurance cost per unit	$0.02
Add: Commission to sales person (10% of Price to whole seller)	$0.09
Per unit variable cost	$0.20

1c. Calculation of Fixed cost:

Fixed Manufacturing cost	$900,000
Add: Advertising cost	$500,000
Add: Manager's salary and other expenses	$35,000
Total	$1,435,000

1d. Calculation of Per unit contribution:

Selling price per unit	$1.00
Less: Variable cost per unit	$0.20
Contribution per unit	$0.80

1e. Calculation of Break even point:

Fixed cost	$1,435,000
Contribution per unit (C.P.U)	$0.80
Break even point [Fixed cost/C.P.U.]	1,793,750 units