In: Operations Management
The case:
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. 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’srequired 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?
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Q07.What is the proposed PCO manufacturer selling price per product and $ profit goal for 2020?
According to the case:
The goal of 2020 $ profit is 25% more of the 2019 profit, i.e., 25% more on $160,000
= (25/100 X 160000) + 160000 = $200,000
Also,
Hai is planning to increase the manufacturer's selling price by $2000 per product.
We need to compute the manufacturer's selling price for each product.
Retail Selling price is provided as:
Camera Lenses for the Mars Rove = $100,000; Street Mapping Systems = $70,000; Infrared Lens for Anti-Terrorism Detection = $25,000
As per the case, the Retail Markup is 39%, Wholesale Markup is 28% and Manufacturer's markup is 6%
1. For Camera Lenses for the Mars Rove:
Retail Cost = 100,000 - 39% of 100,000 = 100,000 - (0.39 X 100,000) = $61,000
Wholesale Cost = 61,000 - 28% of 61000 = 61000 - (0.28 X 61000) = $43,920
Hence Manufacturer's Selling Price(2019) = 43920 - 6% of 43920 = $41,284.8
Manufacturer's Selling price for 2020 = $41,284.8 + $2000 = $43,284.8
2. For Street Mapping Systems:
Retail Cost = 70000 - 39% of 70,000 = 70,000 - (0.39 X 70,000) = $42,700
Wholesale Cost = 42700 - 28% of 42700 = 42700 - (0.28 X 42700) = $30,744
Hence Manufacturer's Selling Price(2019) = 30744 - 6% of 30744 = $28,899.36
Manufacturer's Selling price for 2020 = $28,899.36 + $2000 = $30,899.36
3. For Infrared Lens for Anti-Terrorism Detection:
Retail Cost = 25000 - 39% of 25000 = 25,000 - (0.39 X 25,000) = $15,250
Wholesale Cost = 15250 - 28% of 15250 = 15250 - (0.28 X 15250) = $10,980
Hence Manufacturer's Selling Price(2019) = 10,980 - 6% of 10,980 = $10,321.2
Manufacturer's Selling price for 2020 = $10,321.2 + $2000 = $12,321.2