Question

Spit Curl, the group manager for UpperCrust hairspray is about to launch a new line of hairspray called HelmetHead, designed to appeal to a more cost conscious consumer. Both brands are chemically identical, the real difference is price. HelmetHead is to be test marketed in Des Moines because buyers there fit the user profile. Spit has developed the following information:

Current UpperCrust shelf price                       $3.50 per can

            Proposed HelmetHead shelf price                  $2.50 per can

            Can and applicator cost [both]                       $0.40 per can

            UpperCrust factory overhead                         $2,000,000

            HelmetHead factory overhead                       $750,000

            Direct labor [both brands]                              $0.20 per can

            Ingredients                                                      $0.30 per can

            Packaging for UpperCrust                               $1.00 per can

            Packaging for HelmetHead                             $0.50 per can

            Sales commission [both brands]                    $0.10 per can

            Stocking fee-UpperCrust                                $0.50 per can

            Slotting fee- HelmetHead                              $0.25 per can

            Total national hairspray mkt                          50,000,000 units

            Total potential HelmetHead

Units in Des Moines                                  100,000 units

Current nat'l UpperCrust sales                       10,000,000 units

Current sale of UpperCrust in

Des Moines                                                            500,000 units

Loyal hairspray user usage                             5 cans per year

A. What is the contribution per can for each brand?

Contribution Margin = your net sell price – variable cost

UpperCrust:

Net Sell Price = $3.50

Variable Cost = $0.40 + $0.20 + $0.30 + $1.00 + $0.10 + $0.50 = $2.50

Contribution Margin = $3.50 - $2.50 = $1.00

Helmet Head:

Net Sell Price = $2.50

Variable Cost = $0.40 + $0.20 + $0.30 +$0.50 + $0.10 +$0.25 = $1.75

Contribution Margin = $2.50 - $1.75 = $0.75

B. Management insists upon 10% market share results in HelmetHead test marketing before launching a full scale campaign. How many loyal users would be needed in Des Moines in the next year to obtain this share goal?

10% of market in Des Moines (100,000) = 10,000 Units

Loyal Users = 5 cans per year

Required Loyal Users = 10,000 / 5 = 2,000 Loyal Users

C. What percentage is UpperCrust's current units share above its breakeven point?

Revenue = 3.5x

Cost = 3.5x + $2,000,000

x = 2,000,000

Current sale = 10,000,000

$10,000,000 – 2,000,000 = $8,000,000 = 400% above the Breakeven point

D. What is the break even in units for HelmetHead?

Contribution = $0.75

Fixed Cost = $750,000

Breakeven = $750,000 / $0.75 = $1,000,000 Units

E. Spit expects HelmetHead to cannibalize UpperCrust's national units share by 7.5%. Taking this contribution hit into account [i.e., covering it], what would Spit calculate HelmetHead break even units to be?

F. What are the gross profit margin percentages for UpperCrust and HelmetHead?

Gross Profit Margin = (Sell – Variable cost)/Sell

UpperCrust:

Gross Profit Margin = ($3.50 - $2.50)/ $3.50 = 0.2857

HelmetHead:

Gross Profit Margin = ($2.50 - $1.75) / $2.50 = 0.3

G. Several years in the future when HelmetHead is selling 5,000,000 bottles nationally and UpperCrust is selling 9,000,000 nationally what is the average selling price for the entire shampoo business at Spit Curl?

H.   Spit Curl is considering a new hairspray called SuperModel would have a super shine additive that costs an additional $0.20 per bottle in materials. All other costs would be the same is UpperCrust.    If Spit uses a cost plus pricing approach and wants to achieve a 33% gross margin for SuperModel hairspray at what price would they need to sell it?

I. If they sold SuperModel through beauty salons that required a 40% margin on all products, to achieve their internal margin of 33% plus protect their retailer, what Manufacturers Suggested Retail Price (MSRP) should Spit Curl set for SuperModel?

I really just need help with E,G,H,I but I wouldnt say no to help on the others if they are wrong.

Answer 1

In this question we calculate all the parts by the given information.

A)

Upper cost	Per can
Can and applicator cost	$0.40
Direct labour	$0.20
Ingredients	$0.30
Packaging for uppercrust	$1.00
Sales commission	$0.10
Stocking free uppercost	$0.50
Contribution	$2.50
Upper crust factory overhead	$2,000,000
Helmet Head	Per can
Can and applicator cost	$0.40
Direct labour	$0.20
Ingredients	$0.30
Packaging for helmet head	$0.50
Sales commission	$0.10
Slotting for helmethead	$0.25
Contribution	$1.75
Helmet head factory Overhead	$750,000

B)

Here market share in units is

units

Here given the market sales as 10%,then

units

So here 1 loyal user is equal to 5 units

So,

that is 10 loyel users.

C)

Here given thecurrent uppercrust sales is 10,000,000 units.

So,

Upper crust factory overhead is $2,000,000

current uppercrust shelf price is $3.50, So,

That means

So the uppercrust current unit share is 40%

D)

Here we want to calculate the breakeven point. That is,

Break even= Fixed cost / Contribution margin

per can

helmet head factory overhead= $750,000

units

E)

Here given the current nat'l uppercrust sales is 10,000,000 units

So,

units

units

F)

Here we want to calculate the gross profit margin

So the uppercrust gross profits percentage is

Helmet head gross profit percentage is,

G)

Here we want to calculate the average selling price. That is,

So the total selling price is,

So the average selling price is,

H)

Here,

The contribution for the super model is

Suppose we assume they produce 1,000,000 unit cost then

the factory overhead 2,000,000

cost of production 4,700,000

Then cost per unit is,

So the cost of production is

I)

Here,

So,