Question

EXERCISE 1

Fred Flintstone has just become the product manager for Yabba Dabba Doo, a consumer packaged product with a retail price of $2.00. Retail margins on the product are 33%, while wholesalers take a 12% margin. Yabba and its direct competitors sell a total of 40 million units annually, and Yabba has 24% market share of this total. Variable manufacturing costs for Yabba are $0.09 per unit. Fixed manufacturing costs are $1,800,000. The advertising budget for Yabba is $1,000,000. The product manager’s salary and expenses total $70,000. Salespeople are paid entirely by a 10% commission. Shipping costs, breakage, insurance, and other miscellaneous costs are $0.04 per unit.

Upon reflection, Fred decides not to increase Yabba Dabba Doo’s advertising budget and keeps it at $1,000,000. Instead, he listens to his neighbor Barney and decides to give retailers an incentive to promote Yabba by raising their margins from 33% to 40%. The margin increase would be accomplished by lowering the price of the product to retailers. Wholesaler margins would remain at 12%

If retailer margins are raised to 40% next year, how many units will Yabba have to sell to break even?

A)How many units will Yabba have to sell next year in order for it to achieve the same profit that it did this year?

B)What will Yabba’s market share have to be next year for its profit to be the same as this year?

C)What will Yabba’s market share have to be for it to generate a profit of $700,000?

Answer 1

The selling price of Yabba to wholsalers can be calculayed as follows:

Retail price	$2.00
Retailer Margin	33%
Retailer cost price	$1.50
Wholesaler selling price	$1.50
Wholesaler margin	12%
Wholesaler cost price	$1.34
Yabba selling price	$1.34

Retailer cost price = selling price / (1+ margin)

If the margin of retailer is increased to 40%, the new selling price of Yabbas is as follows:

Retail price	$2.00
Retailer Margin	40%
Retailer cost price	$1.43
Wholesaler selling price	$1.43
Wholesaler margin	12%
Wholesaler cost price	$1.28
Yabba selling price	$1.28

Break even units at 40% margin to retailers = fixed costs / contribution margin per unit

Yabba selling price	$1.28
Variable cost per unit	$0.09
Othe rmisc cost per unit	$0.04
Sales commission	$0.13
Contribution margin	$1.02

Break even units = 2870000 / 1.02

= 2819366 units

A) Unit sale for target profit = (total fixed expenses + target profit) / contribution margin per unit

Target profit or profit for this year is calculated below:

Sales unit	96,00,000
Selling price	$1.34
Sales revenue	$1,28,89,366
Variable manufacturing cost per unit	$0.09
Variable manufacturing cost	$8,64,000
Fixed manufacturing costs	$18,00,000
Advertising	$10,00,000
salary and expenses	$70,000
Sales commission	$12,88,936.63
Shipping and other misc cost per unit	$0.04
Shipping and other misc cost	$3,84,000
Net profit	$74,82,429.6

Note: number of units = 40 million * 24% = 96,00,000

Units for target profit = (2870000 + 7482429.6) / 1.02

= 1,01,49,441 units

B) New Market share of Yabba = units for target profit / total market sales

= 10149441 / 40000000

= 25.37%

C) To generate a profit of 700000, the units to be sold = (2870000 + 700000) /1.02

= 35,00,000 units

Market share of Yabba = 3500000 / 40000000 = 8.75%