In: Economics
Hydropump, Inc. produces and sells high-quality pumps to business customers. Its marketing research shows a growing market for a similar type of pump aimed at final consumers-for use with jacuzzi-style tubs in home remodeling jobs. Hydropump will have to develop new channels of distribution to reach this target market because most consumers rely on a retailer for advice about the combination of tub, pump, heater, and related plumbing fixtures they need. Hydropump's marketing manager. Robert Black, is trying to decide between intensive and selective distribution. With intensive distribution, he wouid try to sell through all the plumbing supply, bathroom fixture, and hot-tub retailers who will carry the pump. He estimates that about 5,600 suitable retailers would be willing to carry a new pump. With selective distribution, he would focus on about 280 of the best hot-tub dealers (two or three in the hundred largest metropolitan areas). Intensive distribution would require Hydropump to do more mass selling-primarily advertising in home renovation magazines-to help stimulate consumer familiarity with the brand and convince retailers that Hydropump equipment will sell. The price to the retailer might have to be lower too (to permit a bigger markup) so they will be motivated to sell Hydropump rather than some other brand offering a smaller markup. With intensive distribution, each Hydropump sales rep could probably handle about 300 retailers effectively. With selective distribution, each sales rep could handle only about 70 retailers because more merchandising help would be necessary. Managing the smaller sales force and fewer retailers—with the selective approach-would require less manager overhead cost. Going to all suitable and available retailers would make the pump available through about 20 times as many retailers and have the potential of reaching more customers. However, many customers shop at more than one retailer before making a final choice-so selective distribution would reach almost as many potential customers. Further, if Hydropump is using selective distribution, it would get more in-store sales attention for its pump-and a larger share of pump purchases-at each retailer. Black has decided to use a spreadsheet to analyze the benefits and costs of intensive versus selective distribution.
d. Hydropump's marketing manager thinks that the type of channel relationship possible with selective distribution would make it possible to get a large share (40 percent) of the pumps sold by its hot-tub dealers. But he realizes that the actual percent might vary. He thinks that the percent could be as low as 35 percent, or go as high as 45 percent. He wants to evaluate the effect that this might have on expected profits. Do a What If analysis, based on the selective distribution alternative, varying Hydropump's percent of dealer unit sales between 35 percent and 45 percent and displaying Hydropump's unit sales and profit, and then complete the missing numbers in the table below.
g. With this change in the sales force, Hydropump's manager is confident that the firm will get at least 40 percent—and perhaps as high as 50 percent—of the pumps sold by the dealers. Evaluate Hydropump's likely profit in this situation—and then compare it with your previous analysis (above). Would you recommend that Hydropump add the extra sales reps? Discuss your reasons.
SPREADSHEET FOR CALCULATIONS
Intensive Distribution |
Selective Distribution |
|
Number of Retailers |
5600 |
280 |
Retailers per Sales Rep |
300 |
70 |
Sales Reps Needed |
19 |
4 |
Salary per Sales Rep |
18000.00 |
18000 00 |
Personal Selling Expense |
342000,00 |
72000.00 |
Mass-selling Expense |
200000.00 |
50000.00 |
Overhead Cost |
120000.00 |
80000.00 |
Cost to Produce a Pump |
35.00 |
35.00 |
Total Pumps Sold by Dealers |
175000 |
26000 |
Hydropump's Percent of Dealers' Units |
14.00 |
40.00 |
Total Expected Units |
24500 |
10400 |
Price to Retailers |
70.00 |
75.00 |
Hydropump Total Revenue |
1715000.00 |
780000.00 |
Hydropump Total Cost |
1519500.00 |
566000.00 |
Hydropump Profit |
195500.00 |
214000.00 |
*Answer:
Basic Calculations as per Cost Volume profit Analysis
Particular |
Intensive Distribution |
Selective Distribution |
Sale Price per unit |
70 |
75 |
Variable Cost per Unit |
35 |
35 |
Contribution per Unit |
35 |
40 |
No. of units Sold |
24500 |
10400 |
Total Contribution |
857500 |
416000 |
Less : fixed Cost |
662000 |
202000 |
Hydropump Profit |
195500 |
214000 |
Ques c. With intensive distribution, how large a share (per¬cent) of the retailers' total unit sales would Hydro¬pump have to capture to sell enough pumps to earn $200,000 profit?
Answer C.
Particular |
Amount |
Desired Profit |
$ 200,000.00 |
Current Budgeted profit |
$ 195,500.00 |
Increase in Contribution Required |
$ 4,500.00 |
Contribution per Unit |
$ 35.00 |
Additional Sales units Required (Rounded off) |
128.57 |
Current Budgeted Units to be sold |
24,500.00 |
Total Units to be sold |
24,628.57 |
Total Pumps Sold by Dealers |
175,000.00 |
Hydropump's Percent of Dealers' Units |
14.073% |
Increase required in Hydropump's Percent of Dealers' Units |
0.07% |
Ques D) Do a What If analysis, based on the selective distribution alternative, varying Hydropump's percent of dealer unit sales between 35 percent and 45 percent and displaying Hydropump's unit sales and profit,
Answer D)
What If Analysis at 40%, 35% & 45% Market Share
Particular |
At 40% level |
At 35% level |
At 40% level |
Sale Price per unit |
$ 75.00 |
$ 75.00 |
$ 75.00 |
Variable Cost per Unit |
$ 35.00 |
$ 35.00 |
$ 35.00 |
Contribution per Unit |
$ 40.00 |
$ 40.00 |
$ 40.00 |
No. of units Sold |
10,400.00 |
9,100.00 |
11,700.00 |
Total Contribution |
$ 416,000.00 |
$ 364,000.00 |
$ 468,000.00 |
Less : fixed Cost |
$ 202,000.00 |
$ 202,000.00 |
$ 202,000.00 |
Hydropump Profit |
$ 214,000.00 |
$ 162,000.00 |
$ 266,000.00 |
Ques E) How important is it that Hydropump win at least a 40 percent share of the dealers' unit sales? Explain your reasons.
Answer E) it is important for Hydro pump to win at least a 40 percent share of the dealers' unit sales because if this percentage falls below 38%, the profit under Selective distribution will fall below $ 195,500 ie the profit under intensive distribution option. In that case selective distribution will not be attractive enough economically.
Ques F) If each rep is assigned only 47 dealers, instead of 70, how many more sales reps would be needed, and how much would personal selling costs increase?
Ans F)
Particular |
Amount |
No. of Sales Representative needed at 47 retailers per Rep |
6.00 |
Personal Selling Cost for 6 Sales Rep |
$ 108,000.00 |
Personal Selling Cost for 4 Sales Rep |
$ 72,000.00 |
Increase in Personal Selling Cost |
$ 36,000.00 |
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