Marketing Arithmetic Exercise #2 Joe Stich has just become product manager for Brand X. Brand X is...

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Marketing Arithmetic Exercise #2
Joe Stich has just become product manager for Brand X. Brand Xis a consumer product with a retail price of$1.00.  Retail margins on the product are 33%, whilewholesalers take a 12% margin. Brand X and its direct competitorssell a total of 20 million units annually; Brand X has a 24% shareof this market.  Variable manufacturing costs for Brand Xare $0.09 per unit.  Fixed manufacturing costs are$900,000.  The advertising budget for Brand X is$500,000.  The Brand X product manager's salary andexpenses total $35,000.  Salespeople are paid entirely bya 10% commission.  Shipping costs, breakage, insuranceand so forth are $0.02 per unit.
1.   What is the unitcontribution for Brand X?
2.   What is Brand X'sbreak-even point?
3.   What market sharedoes Brand X need to break even?
4.   What is Brand X'sprofit impact?  [Note profit impact = total contribution– fixed costs]
5.   Industry demand isexpected to increase to 23 million units next year.  Mr.Stich is considering raising his advertising budget to $1million.
5a.   If theadvertising budget is raised, how many units will Brand X have tosell to break even?
5b.   How many unitswill Brand X have to sell in order for it to achieve the sameprofit impact that it did this year?
5c.   What will BrandX's market share have to be next year for its profit impact to bethe same as this year?
5d.   What will BrandX's market share have to be for it to have a $1 million profitimpact?
6.   Upon reflection,Mr. Stich decides not to increase Brand X's advertising budget.Instead, he thinks he might give retailers and incentive to promoteBrand X by increasing their margins from 33% to 40%.  Themargin increase would be accomplished by lowering the price of theproduct to retailers. Wholesaler margins would remain at 12%.
6a.   If retailermargins are raised to 40% next year, how many units will Brand Xhave to sell to break even?
6b.   How many unitswill Brand X have to sell to achieve the same profit impact nextyear as it did this year?
6c.   What would BrandX's market share have to be for its profit impact to remain at thisyear's level.
6d.   What would BrandX's market share have to be for it to generate a profit impact of$350,000?

Answer & Explanation Solved by verified expert

4.4 Ratings (845 Votes)


1	Unit contribution of Brand X
	Retail Price	$1.00
	Retail Margin	33%
	Retail Profit	$0.33	(1.00*33%)
	Retail Cost	$0.67	(1-0.33)
	Wholesale Margin	12%
	Wholesale Profit	$0.08	(0.67*12%)
	Wholesale Cost	$0.59	(0.67-0.08)
	Manufacturers Selling Price per unit	$0.59
	Variable manufacturing cost per unit	$0.09
	Variable cost of commission per unit	$0.06	(10%*0.59)
	Variable shipping cost brokerage etc	$0.02
	Total Variable cost per unit	$0.17	(0.09+0.06+0.02)
	Unit contribution of Brand X	$0.42	(0.59-0.17)

2	Break even point in unit=Total Fixed Costs/Unit Contribution
a	Fixed Manufacturing Cost	$900,000
b	Advertising cost	$500,000
c	Product manager's Salary and expenses	$35,000
d=a+b+c	Total Fixed Costs	$1,435,000
e	Unit contribution of Brand X	$0.42
f=d/e	Break Even Point	3,411,468

3	Market Share Needed for break even
g	Total market demand	20,000,000
f	Break Even Point	3,411,468
h=f/g	Market Share Needed to break even	0.170573412
	Market Share Needed (Percentage)	17%

4	Profit Impact
j	Sales Quantity=24% *20 million	4,800,000
e	Unit Contribution	$0.42
k=j*e	Total contribution	$2,019,072
d	Fixed Costs	$1,435,000
l=k-d	Profit Impact	$584,072

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Transcribed Image Text

Marketing Arithmetic Exercise #2Joe Stich has just become product manager for Brand X. Brand Xis a consumer product with a retail price of$1.00. Retail margins on the product are 33%, whilewholesalers take a 12% margin. Brand X and its direct competitorssell a total of 20 million units annually; Brand X has a 24% shareof this market. Variable manufacturing costs for Brand Xare $0.09 per unit. Fixed manufacturing costs are$900,000. The advertising budget for Brand X is$500,000. The Brand X product manager's salary andexpenses total $35,000. Salespeople are paid entirely bya 10% commission. Shipping costs, breakage, insuranceand so forth are $0.02 per unit.1. What is the unitcontribution for Brand X?2. What is Brand X'sbreak-even point?3. What market sharedoes Brand X need to break even?4. What is Brand X'sprofit impact? [Note profit impact = total contribution– fixed costs]5. Industry demand isexpected to increase to 23 million units next year. Mr.Stich is considering raising his advertising budget to $1million.5a. If theadvertising budget is raised, how many units will Brand X have tosell to break even?5b. How many unitswill Brand X have to sell in order for it to achieve the sameprofit impact that it did this year?5c. What will BrandX's market share have to be next year for its profit impact to bethe same as this year?5d. What will BrandX's market share have to be for it to have a $1 million profitimpact?6. Upon reflection,Mr. Stich decides not to increase Brand X's advertising budget.Instead, he thinks he might give retailers and incentive to promoteBrand X by increasing their margins from 33% to 40%. Themargin increase would be accomplished by lowering the price of theproduct to retailers. Wholesaler margins would remain at 12%.6a. If retailermargins are raised to 40% next year, how many units will Brand Xhave to sell to break even?6b. How many unitswill Brand X have to sell to achieve the same profit impact nextyear as it did this year?6c. What would BrandX's market share have to be for its profit impact to remain at thisyear's level.6d. What would BrandX's market share have to be for it to generate a profit impact of$350,000?