Spit Curl the group manager for UpperCrust hairspray is abou

Spit Curl, the group manager for UpperCrust hairspray is about to launch a new line of hairspray called HelmetHead, designed to appeal to a more cost conscious consumer. Both brands are chemically identical, the real difference is price. HelmetHead is to be test marketed in Des Moines because buyers there fit the user profile. Spit has developed the following information:

Current UpperCrust shelf price                  $3.50 per can

Proposed HelmetHead shelf price                       $2.50 per can

Can and applicator cost [both]                 $0.40 per can

UpperCrust factory overhead $2,000,000

HelmetHead factory overhead                  $750,000

Direct labor [both brands]                         $0.20 per can

Ingredients $0.30 per can

Packaging for UpperCrust $1.00 per can

Packaging for HelmetHead $0.50 per can

Sales commission [both brands]             $0.10 per can

Stocking fee-UpperCrust $0.50 per can

Slotting fee- HelmetHead                          $0.25 per can

Total national hairspray mkt                                50,000,000 units

Total potential HelmetHead Units in Des Moines 100,000 units

Current nat\'l UpperCrust sales                  10,000,000 units

Current sale of UpperCrust in Des Moines 500,000 units

Loyal hairspray user usage                                    5 cans per year

A. What is the contribution per can for each brand?

B. Management insists upon 10% market share results in HelmetHead test marketing before launching a full scale campaign. How many loyal users would be needed in Des Moines in the next year to obtain this share goal?

C. What percentage is UpperCrust\'s current units share above its breakeven point?

D. What is the break even in units for HelmetHead?

E. Spit expects HelmetHead to cannibalize UpperCrust\'s national units share by 7.5%. Taking this contribution hit into account [i.e., covering it], what would Spit calculate HelmetHead break even units to be?

F. What are the gross profit margin percentages for UpperCrust and HelmetHead?

G. Several years in the future when HelmetHead is selling 5,000,000 bottles nationally and UpperCrust is selling 9,000,000 nationally what is the average selling price for the entire shampoo business at Spit Curl?

H.   Spit Curl is considering a new hairspray called SuperModel would have a super shine additive that costs an additional $0.20 per bottle in materials. All other costs would be the same is UpperCrust.    If Spit uses a cost plus pricing approach and wants to achieve a 33% gross margin for SuperModel hairspray at what price would they need to sell it?

I. If they sold SuperModel through beauty salons that required a 40% margin on all products, to achieve their internal margin of 33% plus protect their retailer, what Manufacturers Suggested Retail Price (MSRP) should Spit Curl set for SuperModel?

Solution

A Contribution = Sale Price - Variable Costs

   UpperCrust = 3.5 - 2.5 = $1

   HelmetHead = 2.5 - 1.75 = $.75

B) 10% market share in Des Moines = 10% of 100,000 = 10,000

      If every loyal user consumes 5 cans/ year, total users needed = 10,000/5 = 2000

C) Breakeven occurs when total revenue = total cost

    Let x be breakeven quantity. Revenue = 3.5x

    Cost = Fixed + Variable = 2.5x + 2 Million

    Equating, x = 2 Mil

    Current sale = 10 mil. Therefore 8 mill or 400% is above breakeven

D) From A, we have HelmetHead contribution = .75

      Fixed Cost = 750k

      Equating, breakeven = 1 Million Units

F) Gross Profit Margin = Total Revenue - DIrect Costs/ Total Revenue

    Upper Crust = 1/3.5 = .2851

    HelmetHead = .75/2.5 = .3