I You have just been appointed the product manager of the St

(I) You have just been appointed the product manager of the \"Steamy\" brand of vegetable blenders in a large consumer products company. As part of your new job, you want to develop an understanding of the financial situation for your product. Your brand assistant has provided you with the following facts:

a. Retail selling price                                                  $60 per unit

b. Retailer\'s margin                                                     30%

c. Jobber\'s margin                                                      25%

d. Wholesaler\'s margin[1]                                              20%

e. Direct factory labor                                     $2.5 per unit

f. Raw materials                                                         $2 per unit

g. All factory and administrative overheads               $3 per unit (if unit volume = 100,000)

h. Salesperson\'s commissions                                    15% of manufacturer\'s selling price

i. Sales force travel costs                                            $330,000

j. Advertising                                                             $650,000

k. Total market for vegetable blenders                        1 million units

l. Current yearly sales of \"Steamy\"                            190,000 units

Questions

1. What is the contribution per unit for the \"Steamy\" brand?[2]

2. What is the break-even-volume in units and in dollars?

3. What market share does the Steamy brand need to break even?

4. What is the current total contribution?

5. What is the current before-tax profit of the Steamy brand?

6. What market share must Steamy obtain to contribute a before tax profit of exactly $2.6 million?

(II) One of the first decisions you have to make as the brand manager for Steamy is whether or not to add a new line of vegetable blenders, the \"Super-Steamy line. The line would be marketed in addition to the original Steamy line. Your brand assistant has provided you with the following facts.

a. Retail selling price                                                  $80 per unit

b. All margins the same as before

c. Direct factory labor                                     $4 per unit

d. Raw materials                                                         $6 per unit

e. Additional factory and admin. overheads               $4 per unit

                                                                                    (if unit volume = 50,000)

f. Salesperson\'s commissions: the same percent as before

g. Incremental sales force travel cost                          $95,000

h. Advertising for Super Steamy                                $700,000

i. New equipment needed                                           $1,300,000 (to be depreciated over 10 years)

j. Research and development spent                             $250,000

            up to now

k. Research and development to be                            $600,000 (to be amortized over 5 years)

     spent this year to commercialize

     the product

Questions

1. What is the contribution per unit of the Super-Steamy brand?

2. What is the break-even volume in units and in dollars?

3. What is the sales volume in units necessary for Super Steamy to yield in the first year, a 18 percent return on the equipment to be invested in the project?

(III) The $80 selling price for Super Steamy seems high to you. You thought you might lower the price to $70 per unit and raise retail margin to 35 percent.

Question

            What is the break-even volume in units?

[1] The manufacturer sells to the wholesaler. The wholesaler sells to the jobber who, in turn, sells to the retailer.

[2] You are a part of the company that manufactures Steamy. Hence, you have to view this problem from the perspective of the manufacturer of the product (and not from that of the middlemen).

Solution

PLEASE FIND ANSWERS TO ALL 6 PARTS OF FIRST QUESTION :

Sales price / unit for manufacturer

= Retail selling price /( ( 1 + retailers margin/100) x ( 1 + Jobber’s margin/100) x ( 1 + Wholesaler’s margin/100) )

= $60 / ( 1.3 x 1.25 x 1.20)

= $30.77 ( rounded to 2 decimal places )

Cost for manufacturer:

Direct cost ( or variable cost ) = Direct factory Labor + Direct raw material cost + sales person’s commission

= $2.5 + $2 + 15% of $60/ unit = $2.5 + $2 +$9 = $13.5

Contribution margin = Sales price / unit – Variable cost / unit = $30.77 - $13.5 = $17.27 per unit

CONTRIBUTION PER UNIT FOR STEAMY BRAND = $17.27 / UNIT

Indirect costs

= $300,000 Factory and administrative overheads + $330,000 Salesforce travel cost + $650,000 Advertising cost

= $1280,000

At break even volume , Total Revenue = Total cost = Total direct cost + Total indirect cost

Let the , breakeven volume = N

Thus, Total revenue = Sales price / unit x N = $30.77.N

Total cost = Direct cost/ unit x N + Total indirect cost

Or, 30.77.N = 13.5.N + 1280,000

Or, 17.27.N = 1280,000

Or, N = 1280,000/17.27 = 74116.96 ( 74117 rounded to nearest whole number )

Breakeven value ( $) = 30.77 x 74117 = $2280580

BREAKEVEN VALUE = $2280580, BREAKEVEN VOLUME = 74117 UNITS

Required market share to break even

= Break even volume/ Market size x 100

= 74117/1000000 x 100

= 7.41%

STEAMY BRAND NEEDS 7.41% MARKET SHARE TO BREAKEVEN

Current total contribution

= ( Price / unit – Variable cost / unit ) x 190,000 units as current yearly sales

= ( 30.77 – 13.5 ) x 190,000

= 17.27 x 190,000

= $3281300

CURRENT TOTAL CONTRIBUTION = $3281300

Current before tax profit

= Current total contribution – Total indirect cost

= $3281,300 - $1280,000

= $2001300

CURRENT BEFORE TAX PROFIT = $2001300

Required before tax profit = $ 2600000 ( $2.6 million )

Let required volume of sales = V

Since ,

Before tax profit = ( Price / unit – Variable cost/ unit) x V - Total indirect cost

Or, 2600000 = ( 30.77 – 13.5) x V - 1280000

Or, 2600000 = 17.27.V - 1280000

Or, 17.27.V = 2600000 + 1280000 = 3880000

Or, V = 3880000/17.27 = 224667.05 ( 224667 ROUNDED TO NEAREST WHOLE NUMBER )

Corresponding market share = 224667/ 1000000 x 100 = 22.47 %

REQUIRED MARKET SHARE = 22.47%

CONTRIBUTION PER UNIT FOR STEAMY BRAND = $17.27 / UNIT