Question

Hai Vu is the new president of Pacific Coast Optics (PCO) a small manufacturing firm in Sacramento, CA which produces fiber lenses for Street Mapping System, Infrared Lens for Anti-Terrorism Detection, and Camera Lenses for the Mars Rove. Hai Vu recently bought this company from his former employer. PCO used brokers to sell to wholesalers who marketed to retailers. Hai Vu occasionally thought about eventually developing his own sales force, but that was still some time away. Hai Vu is currently taking a second look at his plan to improve his firm’s profit performance. In 2019 PCO had a modest profit of $160,000; his 2020 goal is to increase this by 25%.

The 2019 retail selling prices of the three products PCO sold were $100,000 (Camera Lenses for the Mars Rove, $70,000 (Street Mapping Systems), and $25,000 (Infrared Lens for Anti-Terrorism Detection) per product, accounting for 25%, 40%, and 35%, respectively, of retail sales.[1] In 2019, PCO paid its brokers a 6% commission on all products sold to wholesalers. Wholesalers margin was 28% on retailer purchase price while retailers’ markup was 39% on wholesaler selling price. PCO’s 2019 material and labor costs per product ran about $20,000, while packaging and crating costs were $500 per product.

Hai Vu estimates machinery maintenance expenditures to be about $90,000 per year. PCO uses both “push” and “pull” promotional approaches to marketing through their channels of distribution. PCO products aside a $5 product information brochure for every product . In 2019, PCO attended two national trade shows at $9,000 each and 4 regional trade shows at about $4,000 each. PCO spent nearly $240,000 advertising in national consumer magazines and an additional $30,000 in trade publications to wholesalers and retailers. All of these will repeat for 2020.

Broker commission for 2020 will increase to 12% while packaging crating costs will go up to $505 per product. Hai Vu also plans to increase 2020 manufacturer selling price by about $2000 per product.

Assuming no changes in costs and prices other than those mentioned earlier, how will Hai Vu’s required level of sales (RLS) to reach the 2020 profit goal, in units and dollars, differ from those for the 2019 profit goal, in units and dollars? That is, will they go up, down or stay the same?

Q01.    What was the weighted average retail selling price of a typical PCO PRODUCT in 2019? Based on this, what was the 2019 retailer’s cost, the wholesaler selling price, the wholesaler’s cost and therefore PCO’s manufacturer selling price of a typical product?

Q02.    Starting with the weighted retail selling price, calculate PCO’s 2019 manufacturer selling price of a typical product in a single step, using the markup chain concept.

Q03.    Line itemize, then total these to determine PCO’s 2019 unit variable cost of a typical product.

Q04.    What was PCO’s 2019 $Contribution and %Contribution for a typical product?

Answer 1

Set 1	Set 2	Set 3
	Retail selling price in 2017 $	800	600	400
	Percentage share of sales	25%	40%	35%
		28% on sale price	39% on cost
	Company ------------->Wholesaler------------------->Retailer--------------->retail selling price
	For 2017	Set 1	Set 2	Set 3
	Retail selling price in 2017 $	800	600	400
	Retailer purchase price	576	432	288	(100/139* retail price)=whole saler selling price
	Less: margin by whole saler	(161)	(121)	(81)	(Retail purchase price * 28%)
	Cost to Whole saler	414.39	310.79	207.19	(Retail purchase price - margin by wholesaler)
	Selling price by OGAI	414.39	310.79	207.19	(which is the cost to whole saler)
Q1	a. weighted average retail selling price for OGAI:
		Set 1	Set 2	Set 3
	Retail selling price in 2017 $	800	600	400
	Percentage share of sales	25%	40%	35%
	Weighted avg retail selling price	=(800*.25)+(600*.40)+(400*.35)
		580
	b. Retailers cost:	Set 1	Set 2	Set 3
	Retailer purchase price $	575.54	431.65	287.77	(given in working note above)
	Whole saler selling price $	575.54	431.65	287.77	(given in working note above)
	Whole saler's cost $	414.39	310.79	207.19	(given in working note above)
	OGAI manufacturer selling price $	414.39	310.79	207.19
Q2	Weighted retail selling price $	580.00
	For 2017	Weighted avg price per set $	Set 1	Set 2	Set 3
	Retail selling price in 2017 $	580.00	800	600	400
	Retailer purchase price	417.27	576	432	288	(100/139* retail price)=whole saler selling price
	Less: margin by whole saler	(116.83)	(161)	(121)	(81)	(Retail purchase price * 28%)
	Cost to Whole saler	300.43	414.39	310.79	207.19	(Retail purchase price - margin by wholesaler)
	Selling price by OGAI	300.43	414.39	310.79	207.19	(which is the cost to whole saler)
Q3	Determination of OGAI's variable cost per unit:
	For 2017	Weighted avg price per set $	Set 1	Set 2	Set 3
	Selling price by OGAI to wholesaler	300.43	414.39	310.79	207.19
	Variable costs:
	Commission to whole saler	27.04	37.29	27.97	18.65	(selling price by OGAI * 9%)
	Material & labour costs per set		95	95	95
	Packing & Craft		8.35	8.35	8.35
	Total variable cost per unit		140.64	131.32	122.00
	Contribution per set $		273.74	179.47	85.20	(selling price - variable cost per unit)
Q4	Determination of OGAI's contribution per unit:
	For 2017	Wtd avg	Set 1	Set 2	Set 3
	Selling price for OGAI to wholesaler	414.39	310.79	207.19
	Less: Variable cost per unit		140.644964	131.321223	121.9975	(as per above working)
	Contribution per unit	170.04	273.74	179.47	85.20
	Contribution %	0.54	66%	58%	41%	(contribution/selling price)