Question

One of the first decisions you have to make as the brand manager for Verona coffee is whether or not to add a new line of coffee makers called the "Super-Verona" line. The line would be marketed in addition to the original Verona line. Your brand assistant has provided you with the following facts:

- The manufacturer sells to the wholesaler. The wholesaler sells to the jobber who, in turn, sells to the retailer.

- You are a part of the company that manufactures Verona. Hence, you have to view this problem from the perspective of the manufacturer of the product(and not from the middlemen).

a. Retail Selling Price.........................................................................................................$100/unit

b. Retailer's Margin..............................................................................................................32%

c. Jobber's Margin.................................................................................................................25%

d. Wholesaler's Margin..........................................................................................................20%

e. Direct Factory Labor...........................................................................................................$3/unit

f. Raw Materials......................................................................................................................$6/unit

g. Additional Factory and Admin Overheads...........................................................................$4/unit

h. Salesperson's Commision ..................................................................................................10%(of manufacturer's selling price)

i. Incremental Sales Force Travel Cost....................................................................................$95,000

j. Advertising.............................................................................................................................$750,000

k. New Equipment Needed........................................................................................................$120,000(to be depreciated over 10 years)

l. Research and Development Spent up to now.........................................................................$250,000

m. Research and Development to be spent this year to commercialize the product.................. $625,000(to be ammortized over 5 years)

Questions:

1. What is the contribution per unit of the Super-Verona brand?

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

3. What is the sales volume in units necessary for Super Verona to yield in the first year, a 16% return on the equipment to be invested in the project?

4. The $100 selling price for Super Verona seems high to you. You thought you might lower the price to $88/unit and raise retail margin to 36%. What is the new break-even volume in units?

Answer 1

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

                                                         = 100/ ((1+.32)x(1+.25)x(1+.20))

                                                         = $100 / 1.98

                                                         = $50.51

Total variable cost per unit = Raw material + Direct labor

                                   = $3+ $6

                                    = $9

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

                                        = $50.51 - $9

                                        = $41.51