Your firm has typically relied on its sales force, but with this new product, you will...

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Finance

Your firm has typically relied on its sales force, but with thisnew product, you will be going into new markets--your sales forcehas not been there before.  In addition, the product hasa relatively low contribution margin ($40.00), making it difficultto justify making direct sales calls.  Assume that theonly fixed costs you need to cover are your marketingexpenses.  Consider the following communications methodsfor informing potential customers about your product:
1.   Direct mail
You could obtain mailing lists with22,000 names of possible users for $1205.  You couldproduce and deliver a mailing which would include a letter, asample of the product, a reply card and a brochure for $3.00each.  You expect a 10% return of the replycards.  You would have an outside telemarketing salesorganization make the return calls--they would charge $12.00 percall.
2.   Advertising
You could use trade journals to reachyour target audience (production and packagingengineers).  To advertise for one year in seven of thesetrade journals would cost $100,000.  You would encourageresponses to the ads by including a reply coupon in the body of theadvertisement of by including the product on the multicompany"Bingogram" information request cards.  You think youmight be able to generate 10,000 inquiries.  Anyinquiries would be followed up by the same telemarketingorganization.
What is the break even sales volume you would need for each ofthese alternatives?
What assumptions are being made?
One assumption that is being made is that there would be areturn made through the use of mailing.
How sensitive are your results to these assumptions?
Does either alternative seem like a good option?

Answer & Explanation Solved by verified expert

4.4 Ratings (775 Votes)

Sales Less VC Contributions less OFC EBIT Less Interest Less Tax EATPATNI Contribution of 40 1 Direct email 22000 users 1205 3 per user for complete communication Cost 220003 10 of 22000 coming back would cost additional 12 per unit Cost 220012 See Answer

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Transcribed Image Text

Your firm has typically relied on its sales force, but with thisnew product, you will be going into new markets--your sales forcehas not been there before. In addition, the product hasa relatively low contribution margin ($40.00), making it difficultto justify making direct sales calls. Assume that theonly fixed costs you need to cover are your marketingexpenses. Consider the following communications methodsfor informing potential customers about your product:1. Direct mailYou could obtain mailing lists with22,000 names of possible users for $1205. You couldproduce and deliver a mailing which would include a letter, asample of the product, a reply card and a brochure for $3.00each. You expect a 10% return of the replycards. You would have an outside telemarketing salesorganization make the return calls--they would charge $12.00 percall.2. AdvertisingYou could use trade journals to reachyour target audience (production and packagingengineers). To advertise for one year in seven of thesetrade journals would cost $100,000. You would encourageresponses to the ads by including a reply coupon in the body of theadvertisement of by including the product on the multicompany"Bingogram" information request cards. You think youmight be able to generate 10,000 inquiries. Anyinquiries would be followed up by the same telemarketingorganization.What is the break even sales volume you would need for each ofthese alternatives?What assumptions are being made? One assumption that is being made is that there would be areturn made through the use of mailing.How sensitive are your results to these assumptions?Does either alternative seem like a good option?