Question

Case: Monica’s Designer Handbags: Creative Marketing Decision-Making

QUESTIONS FOR STUDENTS TO ANSWER

1. What is Monica’s unit contribution margin (in dollars per handbag) on the Grand*Mart initial deal, using their suggested wholesale price of $20, after incremental direct expenses? (Diagram as Exhibit 2 - Grand*Mart Discount Channel.)
2. What is the incremental profit impact (in dollars per month) of the suggested initial Grand*Mart 2,000 bag deal to Monica, after the increased overhead expense of $25,000? What is the incremental profit impact of the prospective 10,000 bag order, after increased overhead expense of $75,000?
3. What are Monica’s other key financial and non-financial considerations (such as, cannibalization of the independent retailer channel) for the suggested Grand*Mart deal?
4. Should Monica propose the Grand*Mart deal as suggested? Or should she take a pass and stay exclusively with the independent retailer channel? Or should she renegotiate the initial 2,000 bag deal for the first quarter? Should she offer Grand*Mart an exclusive 10,000 deal for the second quarter?
5. What is the maximum wholesale price that Grand*Mart could be willing to pay Monica, given their probable retail price and typical margin requirements? If Monica decides to renegotiate the initial Grand*Mart deal as of the first quarter with volumes of 2,000 bags per month and incremental overhead of $25,000 per month, what “best and final” price should she propose that would be acceptable to both parties? What is the revised incremental profit impact?
6. If Monica decides to offer Grand*Mart an exclusive deal as of the second quarter at minimum volumes of 10,000 bags per month with overhead expenses of $75,000 per month, what “best and final” price should she propose that would be acceptable to both parties? What is the profit impact of this exclusive deal?

Answer 1

Ans. 1. Unit contribution margin = Revenue per unit - variable expenses

= 20 - 0 = $ 20

Ans. 2. Impact in profits

in case no. of units 2000 and overheads are $25000

Price per unit = $20

no. of units produced = 2000

Revenue = 20 * 2000 = $40,000

overheads = 25000

Profit = $40000 - $ 25000 = $15000

in case of no. of units are 10000 and overheads are $ 75000

price per unit = $20

no. of units produced = 10,000

Revenue = 20 * 1000 = 200,000

overheads = 75000

Profits = 200000 - 75000 = 125,000

Profits is increased by $110,000 ( i.e. 125000- 15000) from previous profit when selling units are increased from 2000 to 10000 and overheads are increased from $25,000 to $75,000.

Ans. 3. Monika's financial and non-financial considerations to retailer

1. Price considerations

2.Variable costs

3. Direct costs

4. Unit costs

5.General and administrative costs

6. Fixed sales

7.break even volume

8. Market share

9.profit impact

10. Trade discount

11. Terms of sales

12. Profit margins

13. Time for reflection

14. Research

Ans. 4. Monika's purpose for suggested deal with Grand*Mart which is a buyer, and has its own independent retail channels. Monika was excited to deal with Grand*Mart because she take a pass and stay exclusively with the independent retailer channel.

Ans. 5. Maximum wholesale price Grand*Mart willing to pay Monika is $20 per unit.

Ans. 6.During First deal of 2000 bags with Grand*Mart, Monika calculate her overheads are $25000. Wholesale price is $20/unit is given by Grand*Mart.

Ans. 7. For the second deal, Number of bags are 10,000 and overheads of monika are $75000. Monika thought she will get profits of $ 2 million with that deal with Grand*Mart. but she is wondered when she was not get same positive impact on her profit as she thought.