Question

3. Armani plans to launch a new series of 3 suits called the Chester, Briarcliff, and Stonebridge (C, B, and S). Each suit is made of a different material. The prices of the suits are $1400, $1100 and $700 respectively. The cost of the materials and unit production costs were $400, $300, and $200. The design cost for the series was $3M and promotional spending was $4M. Assuming that the sales mix for the three suits will be 2:3:5 respectively, a. Calculate the breakeven quantity for each suit. [3] b. Assume that Armani was able to acquire 100,000 customers from the $7M. If the discount rate is 8% and the retention rates in each period for segments C, B and S are 70%, 75%, and 80% respectively. Calculate the CLV for each segment (use the sales mix to determine the number of customers acquired in each segment and the total contribution from part (a) for margins). [5] c. Suppose Armani is considering an increase in margin of 7% per year. Calculate CLV for segment S. [2] d. Suppose the demand last year for Chester suit was 60,000 units at the original $1400 price. How much profit did they make last year, assuming that the fixed cost is distributed equally across the models? [2]

Answer 1

3 ANS) Total Fixed Cost = Designing Cost + Promotional Spending

= $3M + $ 4M

= $ 7 M

Fixed Costs should be divided in the Ratio of 2:3:5 to get the fixed cost attributable for C,B and S seperately. Which are as follows

C = 14,00,000

B= 21,00,000

S= 35,00,000

Variable costs are cost of materials and unit production costs. C=$400 B=$300 S=$200

Selling Price are C=$1400 B=$1100 S=$700

Break Even = Fixed costs / Selling Price - Variable Costs

(NOTE : Contribution or Margin= Selling Price- Variable Costs)

Break even of C = 14,00,000/ 1400-400

= 1400 units

Break Even of B = 21,00,000 / 1100-300

= 2625 units

Break even of S = 35,00,000 / 700-200

= 7000 units.

3b ANS)

CLV = Gross Margin Per Customer ( Retention rate / 1+ Discount rate - retention rate )

Gross Margin : C=1000 B= 800 S=500

Retention rate : C= 70% or 0.7 B=75% or 0.75 S=80%or 0.8

Discount rate = 8% or 0.08

CLV C = 1000 ( 0.70 / 1+0.08-0.70) = $ 1842.11

CLV B = 800 ( 0.75 / 1+0.08-0.75) = $ 1818.18

CLV S = 500 ( 0.80 / 1+ 0.08-0.80) = $ 1428.57

5c ANS)

Increase in margin of segment S by 7%

S= 500 + 7% = $535

CLV S = 535 ( 0.80 / 1+ 0.08-0.80) = $ 1528.57

2d ANS)

Fixed cost is distributed equally across the models. So $7M is to divided equally among each segment which gives us $2.33M or $ 23,300,000 for Chester.

Variable cost for C = 60,000 units * $400 = $ 24,000,000

Therefore total cost = Fixed cost + Variable cost = $ 47,300,000

Total Revenue for C = 60,000 units * $ 1400 = $ 84,000,000

Profit = Revenue-Cost

= 84,000,000-47,300,000

= $ 36,700,000