978-0134492513 Appendix Appendix Part 5

1. A company sells its products for $8.50. It has variable costs of $2.50, and fixed costs

total $250,000. What must its dollar sales be to break even? How many units must it

sell to earn a 20% return on its investment of $100,000?

Answer:

fixed costs $250,000

The difference between the two calculations for breakeven sales is due to

rounding.

2. Determine the market potential for a product that has 8 million prospective buyers

who purchase an average of 2 per year and price averages $50.

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Answer:

Q = n  q  p

where

3. Smithsborough, Inc. had the following profit and loss statement for the year ending

2009:

Sales $50,000,000

Cost of goods sold 10,000,000

Gross Margin $40,000,000

Marketing Expenses

Sales expenses $10,000,000

Promotion expenses 4,000,000 14,000,000

General and Administrative Expenses

Managerial salaries and expenses for the

marketing function $1,000,000

Indirect overhead 6,000,000 7,000,000

Net profit before income tax $19,000,000

Determine the following ratios:

a. gross margin percentage

b. net profit percentage

c. operating expense percentage

d. net marketing contribution

e. marketing return on sales (marketing ROS)

f. marketing return on investment (marketing ROI)

g. Is Smithsborough doing well? Explain your answer.

Answer:

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d.) NMC = net sales  cost of goods sold  marketing expenses

g.) Students’ responses will vary on this question, but most students will agree that

4. Given the following cost structure, calculate 1Blendco, Inc.’s breakeven dollar sales:

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Cost of goods sold equal to 50% of sales

Sales salaries totaling $1,000,000 plus 10% commission on each sale

Advertising expenditures of $500,000

Freight expenses equal 10% of sales

Marketing staff costs equal $250,000 per year

Indirect overhead equals $600,000

Answer:

Breakeven sales can be determined by:

5. Drake,2 Inc. manufactures electric welders that it sells to other manufacturers, and

sales last year were $45 million. Drake has a 35% contribution margin. The

marketing manager has suggested increasing the number of sales representatives by

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five, which would cause fixed costs to increase by $250,000. Another suggestion is

to reduce price by 10%.

a. What incremental dollar volume would be necessary to break even on the

suggestion to hire five additional sales reps?

b. What absolute increase in dollar sales volume would be necessary to

maintain Drake’s current contribution if price was reduced by 10%?

c. Which suggestion do you think Drake should implement? Explain your

recommendation.

Answer:

a.) Add five sales representatives:

b.) Decrease price by 10%:

We must determine the current total contribution with sales of $45 million and the new

contribution margin after price is reduced by 10%.

Therefore,

Old New (reduced 10% )

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So,

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

6. Artco sells framed artwork in approximately 5,000 home decorating stores. Sales

representatives call on each store 5 times per year. The average length of a sales call

is one hour. While an average salesperson works 2,000 hours per year (i.e., 50 weeks

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

such as administrative tasks and travel. How many sales people does Artco need?

Answer:

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

where,

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7. Avian Electronics, Inc. 3manufactures a model of portable music players that can play

music downloaded from the Internet. It is considering adding a more advanced model

of the product that can also download and play video files as well as music files.

Avian’s variable costs and prices to wholesalers are:

Current Audio model New Audio/Video model

Unit selling price $150.00 $250.00

Unit variable costs $60.00 $120.00

The company expects to sell 2 million units of the new audio/video model in the

first year after introduction, but it expects that half of those sales will come from

buyers who would have purchased Avian’s current audio model. Avian estimates

that it would sell 2.5 million units of the current audio model if it did not

introduce the audio/video model. If the fixed cost of launching the new

audio/video model will be $800,000 during the first year, should Avian add the

new model? Why or why not?

Answer:

This is a cannibalization problem. To analyze this problem, we need to determine unit

contributions:

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No further calculations are necessary because the gain in contribution due to

Audio model only Audio and Audio/Video models

8. 4Perfam is a manufacturer of fragrances for women. It currently sells two brands, one

called Allure, which is sold to wholesalers for $40, and another called Beauty, which

is sold to wholesalers for $20. It is considering adding a mid-priced brand called

Classy for $30. Perfam’s variable costs and prices to wholesalers for six ounce

bottles are:

Allure Beauty Classy (new brand)

Unit selling price $40.00 $20.00 $30.00

Unit variable

costs

$20.00 $10.00 $15.00

Perfam expects to sell 10,000 bottles of the new Classy brand, but 5,000 of those sales

will be cannibalized from Allure and 1,000 will be cannibalized from Beauty. Before

Perfam considered the new brand, it had expected to sell 11,000 bottles of Allure and

10,000 bottles of Beauty. Should Perfam launch the new Classy brand?

Answer:

This is a cannibalization problem. To analyze this problem, we need to determine unit

contributions for each brand:

However, it is estimated that Classy will generate an additional 4,000 bottle sales.

Thus,

Contribution due to net new volume = 4,000 bottles  $15 per unit = $60,000

Assuming no increases in fixed costs, Perfam should launch this new brand.

Another way to see is to compare Perfam’s total contribution with and without the

introduction of the new product:

Allure and Beauty only All three brands

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