Question

In 1988, the total fabric wash sales were estimated to be 263,050 tonnes in Pakistan consisted of 247,000 tonnes of laundry soap, 14,500 tonnes of non-soap detergent (NSD) powders, and 750 tonnes of NSD bars. Lever Brothers’ Rin brand was the only NSD Bar in the Pakistan fabric wash market. The price of Rin was Rs 6 for the 250-gram pack. RIN was distributed through 315 distributors to 60,000 retail outlets in the country. This represented almost 100 percent coverage in retail outlets selling detergents. When RIN was launched in 1984, the distributors received a margin of 3 percent on the retail selling price. The retailer margin was at 7 percent of the retail price. In 1988, excise and octroi taxes were together totalling to 5% of the retail selling price. Production department transferred Rin at Rs. 3.6 per unit to marketing department. Marketing department has planned to spend 1 Mn. on selling plus transportation costs and about Rs. 3.5 Mn. on advertising expenses.

A)What is the unit contribution? How many bars of RIN would be required to be sold in 1988 by Lever Brothers to break-even? How much sales in units Rin NSD bar is expected to make in 1988? What is the Gross Marketing Contribution? What is the Net Marketing Contribution?

b) If active fabric wash ingredient is removed from Rin it can still be sold for dish washing purpose. In such a case, the production cost per unit is likely to be reduced by 1/3 of the current transfer cost. However, as the market for dishwashing bars is just 60,000 tonnes with high competition and the repositioning exercises may have negative impact on the sales of Rin. Rin brand manager expects that the sales may reduce to 2/3 of the current sales even if the marketing cost is increased by 20%. If Lever Bros decide to sell Rin as dishwasher, what would be the break-even quantities (in number of bars) required? What would be the net marketing contribution? How much additional profit (net contribution) the brand can add if it sells as a dish washer?

Answer 1

A)

i) Unit Contribution : The unit contribution can be defined as the additional money generated from the sale of each unit after netting off only the Variable cost per unit. Fixed cost is not considered here. Mathematically it can be interpreted as follows

Contribution Per Unit = Selling Price Per unit - Variable cost per unit

ii) Computation of Break Even Point (units) of BEP(Units) :

BEP (Units) = Fixed Cost / Contribution per unit

Where Fixed cost in the given case is computed as follows

Transportation cost = Rs10,00,000

Advertising Expenses = Rs35,00,000

Total Fixed cost = Rs 45,00,000

Computation of Contribution Per unit

Selling Price    - Rs 6.00 (Per unit)

Less

Production cost -Rs(3.60)

Exc & Octroi 5% on 6 -Rs( 0.30) - Rs (3.90) (Per unit)

Gross Contribution Per unit Rs 2.10 ( Per unit)

Less

Dist Margin 3% on 6 -Rs (0.18)

Ret Margin 7$ on 6 -Rs (0.42)    - Rs (0.60) (Per unit)

Net Contribution per unit - Rs 1.50

Substitituting the values in the formula to get

BEP(units) = Rs 45,00,000 /Rs 1.5 = 30,00,000 (units)

iii) Expected Sales for 1988:

It is given 750 tonnes of NSD Sales possible for 1988 & is expected to meet 100% requirement. Each bar weighs 250gm. Therefore number of Bars in sold would be [750x1000x1000]gms / 250 gms = 30,00,000 units

Expected Sales would be 30,00,000 units

iv) Computation of Gross Contribution Margin & Net Contribution Margin

Gross Contribution Margin = Gross Contribution Margin Per unit x No of units

= Rs2.10 x 30,00,000 = Rs63,00,000

Net Contribution Margin = Net Contribution Margin Per unit x No of units

= Rs1.5 x 30,00,000 = Rs 45,00,000

B) Now NSD Bars are split into two a) Dish Wash Bars & b) Original Rin Bars

Revised Sales ( units) would be

Rin Bar 30,00,000 x1/3rd = 10,00,000 ( As sales of Rin is reduced by 2/3rd)

Dish wash bar 30,00,000 x 2/3rd = 20,00,000

i) Computation of Break Even point (units) for Dishwash Bar :

Revised Production cost of Dishwash will be Rs3.6 less 1/3rd of 3.6 = Rs2.4 per unit

Computation of Contribution per unit :

Selling price per unit - Rs 6.00

Less

Production cost : Rs 2.40

Excise & Octroi : Rs 0.30 - Rs( 2.70)

Gross Contribution Per unit - Rs 3.30

Less

Ret Margin 7% on 6 - 0.42

Dist Margin 3% on 6 - 0.18 - Rs (0.60)

Net Contribution Margin - Rs 2.70

Revised Fixed cost = Current Fixed Cost ( Rs 45,00,000) + 25% 0n Rs 45,00,000 = Rs54,00,000

Using the same formula we get

BEP (Units) + Rs54,00,000 /Rs2.70 = 20,00,000

ii) Net Contribution Margin would be as follows

2.7 x 20,00,000 + 1.5 x 10,00,000 = Rs 69,00,000

(Dish wash bar ) (Rin Bar )

iii) Computation of additional profit on account of Dishwas would be

Net Contribituon less Revised Fixed cost

Rs 69,00,000 - Rs 54,00,000 ( as computed above ) = Rs 15,00,000 would be tha additional profit that would be earned on introducing Dishwash Bar.