Question

Problem Set

Assume you have just become a marketing manager for the 747 Classic model of Swingline staplers (note that in this case you work for the manufacturer of the product, so your figures need to be from the manufacturer’s viewpoint). Your product carries a retail price of $18.98. Retailers mark up the product 45% based on selling price (a margin of 45%), while wholesalers take a 17% markup based on cost. Variable manufacturing costs for the 747 are $5.63 per unit. Fixed manufacturing costs are $1,742,000.

The contracted advertising budget for the Classic 747 is $1,220,000. Your salary expenses total $253,000. The salespeople for the brand are paid entirely on commission, which is 11.5%. Direct administrative costs, related to selling and shipping Classic 747s are $0.31 per unit.

In fiscal year 6 the total market for staplers was 35.6 million units. The Classic 747 has 5.8% of the market. For 2016, what is:

The unit contribution of the Classic 747?

The breakeven point (in units) for the Classic 747?

The market share the Classic 747 needs to break even?

The Classic 747's 2011 profit?

In fiscal year 2017, industry demand is expected to decrease to 34.2 million units per year. You are considering raising your advertising budget to $1.45 million, which you feel will increase your market share by 1.5 percentage points. In 2017, if the advertising budget is increased to $1.45 million (holding all other costs steady):

How many Classic 747s will have to be sold to break even?

How many Classic 747s will have to sell for the same profit to be made as in 2016?

Based on the information you have, should Swingline increase their advertising budget (yes or no, plus one sentence of reasoning, including one assumption)?

Another option you have is to not increase the advertising budget. Instead, you think you might give retailers an incentive to promote the Classic 747 by getting them to raise their margins (mark ups based on selling price) from 45% to 52%. This increase would be accomplished by lowering the price of the product to wholesalers and, in turn, to retailers (assume that there will be no change in retail price). With this strategy, you feel your market share will increase by 2.8% in 2012. Wholesaler mark-up based on cost would remain the same at 17%. If retailer mark ups based on price are raised to 52% in 2012, then (assume all other factors are steady):

How many Classic 747s will have to be sold to have the same profits in 2012 as in 2016?

How many Classic 747s will have to be sold to break even?

Based on the information you have, should Swingline allow retailers to increase their margins to 52% in exchange for promoting

Answer 1

Fiscal Year 2016
747 classic Model Swigline Staplers
Sales Price per unit		$18.98
Less: Variable Costs per unit
Sales Commission (11.5%)	$2.18
Administrative Costs	$0.31
Total Variable Costs per unit		$2.49
Contribution per unit		$16.49
Contribution Margin		87%
Fixed Costs
Advertising	$12,220,000
Salary	$253,000
Total Fixed Costs		$12,473,000
Break Even (units) Fixed Costs/Contribution per unit		$756,522
Total Market for Staplers		35,600,000
Required Market share		2%
Statement of Profit
Number of Staplers Sold		2,064,800
Sales revenue		$39,189,904
Less: Costs
Sales Commission	$4,506,839
Salary- Sales Personnel	$253,000
Advertising expenses	$12,220,000
Direct administrative Expenses	$640,088	($17,619,927)
Profit		$21,569,977
Fiscal Year 2017
747 classic Model Swigline Staplers
Sales Price per unit		$18.98
Less: Variable Costs per unit
Sales Commission (11.5%)	$2.18
Administrative Costs	$0.31
Total Variable Costs per unit		$2.49
Contribution per unit		$16.49
Contribution Margin		87%
Fixed Costs
Advertising	$1,450,000
Salary	$253,000
Total Fixed Costs		$1,703,000
Break Even (units) Fixed Costs/Contribution per unit		$103,292
No of Staplers to be sold to make same profit as 2016 (21,569,977+1703,000)/$16.49		1,411,570
Statement of Profit
Number of Staplers Sold		1,411,570
Sales revenue		$26,791,597
Less: Costs
Sales Commission	$3,081,034
Salary- Sales Personnel	$253,000
Advertising expenses	$1,450,000
Direct administrative Expenses	$437,587	($5,221,620)
Profit		$21,569,977