Question

ELSCO, Inc. purchased the formula of a laundry pre-treatment product from a global competitor for $1.5 million. The retail selling price of each 16 oz. bottle is $3.99, with retailers earning a 30% markup. Wholesalers, who earn a markup of 20%, will distribute the product to the retailers. The following cost information pertains to EnviroClean.

Overhead	$800,000
Advertising/Promotion	$250,000
Plastic Bottle	$0.28/bottle
Product Label	$0.05/bottle
Cleaning Solution	$0.215/bottle

Based on the above answer the following:

Cost to the wholesaler?

Cost to the retailer?

Contribution dollars per bottle:

Contribution margin (%) per bottle

Break-even / units:

Break-even / dollars:

Net profit if 1 million bottles are sold:

Number of bottles that must be sold to achieve a $750,000 profit?

Answer 1

1. Cost to the wholesale: $3.99/130% = $3.069

* 30% of mark-up= (100+30%)=130%

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2. Cost to the retail : $3.069 / 120% = $2.557

*20% of mark-up= (100+20%)=120%

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3. Contribution dollars per bottle:  

Sales per unit - Variable cost per unit.

$3.99 - ($0.28 + $0.05 + $0.215) = $3.99 - $0.545 = $3.445

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4. Contribution margin %

=Contribution margin/Sales price

=$3.445/$3.99= 86.34%

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5. Break-Even units= Fixedcost/ Contribution margin per unit

=$800,000+$250,000 / $3.445

=304,790 units

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6. Break-Even dollars= fixed cost/ CM ratio

=$10,50,000/86.34%= $1,216,122.31

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7. Operating profit for 1,000,000 units

Sales(1,000,000*$3.99)= $3,990,000

Less:

Variable cost(1,000,000*$0.545)=$545,000

Contribution Margin(Sales - V.C)= $3,445,000

Less:

Fixed costs ($800,000+$250,000)=$1,050,000

Net Profit (Contribution - Fixed cost)=$2,395,000

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