Question

(I) You have just been appointed the product manager of the "Verona" brand of coffee makers in a large consumer products company. As part of your new job, you want to develop an understanding of the financial situation for your product. Your brand assistant has provided you with the following facts:

a. Retail selling price                                                 $80 per unit

b. Retailer's margin                                                    32%

c. Jobber's margin                                                      25%

d. Wholesaler's margin[1]                                             20%

e. Direct factory labor                                                $2.5 per unit

f. Raw materials                                                         $2 per unit

g. All factory and administrative overheads              $2.4 per unit (if unit volume = 100,000)

h. Salesperson's commissions                                    10% of manufacturer's selling price

i. Sales force travel costs                                           $350,000

j. Advertising                                                             $800,000

k. Total market for coffee makers                              1 million units

l. Current yearly sales of "Verona"                            180,000 units

Questions:

1. What is the contribution per unit for the "Verona" brand?

2. What is the break-even volume in units and in dollars?

3. What market share does the Verona brand need to break even?

4. What is the currents total contribution?

5. What is the current before-tax profit of the Verona brand?

6. What market share must Verona obtain to contribute a before tax profit of exactly $2.5 million?

Answer 1

Solution 1:

Price charged by the producer = Retail price / (1- margin%)

                                                         = 80/ ((1+.32)x(1+.25)x(1+.20))

                                                         = $80 / 1.98

                                                         = $40.40

Total variable cost per unit = Raw material + Direct labor

                                   = $2.50+ $2.0

                                    = $4.50

Contribution per unit = Price charged by the producer - Total variable cost per unit

                                        = $40.40 - $4.50

                                        = $35.90