978-0134492513 Appendix Appendix Part 3

c.) Breakeven sales can be determined by:

fixed costs

Break-even sales = ——————————

contribution margin

Reality check: Breakeven sales should be between $20 million and $40 million because

2.1. Using the profit-and-loss statement you developed in question 2.2b, and assuming

that Westgate’s beginning inventory was $11 million, ending inventory was $7

million, and total investment was $20 million including inventory, determine the

following:

a. gross margin percentage

b. net profit percentage

c. operating expense percentage

d. inventory turnover rate

e. return on investment (ROI)

f. net marketing contribution

g. marketing return on sales (marketing ROS)

h. marketing return on investment (marketing ROI)

i. Is the Westgate division doing well? Explain your answer.

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Answer:

I. Financial Analysis of Marketing Tactics

A. Increase Advertising Expenditures

1. What if HD increases national advertising by 50% to $15 million

(assume no change in the variable cooperative component of

promotional expenditures)?

2. What increase in sales will be needed to break even on this $5

million increase in fixed costs?

3. A quick way to answer this question is to divide the increase in

B. Increase Distribution Coverage

1. HD currently employs 60 sales representatives who earn an

average of $50,000 in salary plus 10% commission on sales.

2. The product is currently sold through 1,875 retail outlets, and HD

wants to increase that to 2,500 outlets.

3. How many additional salespeople will HD need, and what level of

sales will be necessary to break even on the increased cost?

a) The workload method uses the following formula to

determine the salesforce size:

where,

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NS = number of salespeople

NC = number of customers

FC = average frequency of customer calls per customer

LC = average length of customer call

TA = time an average salesperson has available for selling per year

(1) HD reps typically call on accounts an average of 20

(2) So the number of sales reps HD will need to cover

2,500 retail accounts is:

(3) So HD will need to hire 20 more salespeople. The

cost to hire these reps will be $1 million (20

salespeople  $50,000 salary per rep).

b) What increase in sales will be required to break even on

this increase in fixed costs? As seen in the previous

c) Since the average revenue generated per outlet is $53,333

d) This seems reasonable given that current reps cover about

C. Decrease Price

1. What increase in sales would be necessary to break even on a 10%

decrease in price? That is, what increase in sales will be needed to

maintain the total contribution that HD realized at the higher price?

a) Current total contribution = contribution margin  sales =

0.21  $100 million = $21 million.

b) Unit variable costs do not change, however, and can be

determined by multiplying the unit price by the percentage

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c) Price changes result in changes in unit contribution and

break even on this price reduction.

d) New unit contribution and contribution margin can be

calculated as follows:

Old New (reduced 10%)

e) To determine the sales level needed to break even on this

price reduction, calculate the level of sales that must be

attained at the new contribution margin to achieve the

f) Sales must increase by $75 million, and the marketing

D. Extend the Product Line

1. HD is considering introducing a lower-price model in addition to

the original model.

2. Cannibalization is the situation in which one product sold by a

company takes a portion of its sales from other company products.

a) If the new product has a lower contribution than the

b) However, if the new product can generate enough new

c) To assess cannibalization, we must look at the incremental

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3. Assume the first model offered by HD is called HD1 and the new,

4. HD2 will retail for $250 and resellers take the same markup

percentages on price as they do with HD1, so the markup chain is:

5. HD1’s unit contribution is about $35 ($168  $132.72). Recall that

6. HD2’s variable costs are estimated to be $120, which gives a unit

contribution of $20 ($140  $120).

a) Thus, for every unit that HD2 cannibalizes from HD1, the

b) The original estimate for next year’s sales of HD1 was

c) It is estimated that HD2 will generate an additional

7. The net effect is that HD will gain $7 million in total contribution

8. This can be seen by comparing the total contribution with and

HD1 only HD1 and HD2

9. HD should introduce HD2, but only if additional fixed costs do not

exceed $7 million.

E. Marketing by the Numbers Exercise Set Three

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3.1. 1Alliance, Inc. sells gas lamps to consumers through retail outlets. Total industry

sales for Alliance’s relevant market last year were $100 million, with Alliance’s

sales representing 5% of that total. Contribution margin is 25%. Alliance’s sales

force calls on retail outlets and each sales rep earns $50,000 per year plus 1%

commission on all sales. Retailers receive a 40% margin on selling price and

generate average revenue of $10,000 per outlet for Alliance.

a. The marketing manager has suggested increasing consumer advertising by

$200,000. By how much would dollar sales have to increase to break even

on this expenditure? What increase in overall market share does this

represent?

b. Another suggestion is to hire two more sales representatives to gain new

consumer retail accounts. How many new retail outlets would be

necessary to break even on the increased cost of adding three sales reps?

c. A final suggestion is a make a 10% across-the-board price reduction. By

how much would dollar sales have to increase to maintain Alliance’s

current contribution? (See endnote 13 to calculate the new contribution

margin.)

d. Which suggestion do you think Alliance should implement? Explain your

recommendation.

Answer:

a.) Increase advertising by $200,000:

Another way to determine this:

Still another way to determine this:

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So the increase is 0.8 percentage points (from 5% to 5.8% market share).

b.) Add two sales representatives:

Each sales rep earns $50,000 in salary, so the increase in fixed cost = $100,000 (i.e., 2

reps  $50,000).

Retail outlets generate average revenue of $10,000 per outlet for Alliance, so the number

of outlets necessary to break even on the increased cost of adding three sales reps can be

determined by:

c.) Decrease price by 10%:

We must determine the current total contribution and the new contribution margin.

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Old New (reduced 10% )

New contribution margin  new sales level = original total contribution

So,

d.) Students’ recommendations will vary. However, it appears that the suggestion to

reduce price by 10% is the least attractive alternative.

3.2. PepsiCo sells its soft drinks in approximately 400,000 retail establishments, such

as supermarkets, discount stores, and convenience stores. Sales representatives

call on each retail account weekly, which means each account is called on by a

sales rep 52 times per year. The average length of a sales call is 75 minutes (or

1.25 hours). An average salesperson works 2,000 hours per year (50 weeks per

year  40 hours per week), but spends ten hours a week on nonselling activities,

such as administrative tasks and travel. How many sales people does PepsiCo

need?

Answer:

The number of salespeople can be determined by using the workload method:

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where,

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