Question

In: Accounting

A retailer with a chain of stores is planning product promotions for a future period. The...

A retailer with a chain of stores is planning product promotions for a future period. The following information relates to a product which is being considered for a four-week promotion: Normal weekly sales (i.e. without promotion), 2400 units at £2.80 per unit. Normal contribution margin, 45% of normal selling price. Promotional discount, 20% (i.e. normal selling price reduced by 20% during the promotion). Expected promotion sales multiplier, 2.5 (i.e. weekly sales units expected during the promotion is 2.5 × 2400 = 6000 units). Additional fixed costs incurred to run the promotion (i.e. unaffected by the level of promotional sales) are forecast to be £5400. Unit variable costs would be expected to remain at the same level as normal. Required: (a) Calculate the expected incremental profit/(loss) from the promotion. (b) Calculate the sales units multiplier that would be required during the promotion to break even compared with a no-promotion situation. (c) Describe other factors that should be considered before making a decision regarding the promotion.

Expert Solution

Answer (a)

Calculation 0f Profit / Loss under non promotion

Sales (2400*£2.8.) = £6720

Less: Variable Sales (£6720*55%) = £3696

Contribution = £3024

Less: Fixed Cost =£5400

Loss = £2376

Calculation 0f Profit / Loss under Promotion

Sales (6000*(£2.8.-20%)) = £13440

Less: Variable Sales (£6720*55%) = £7392

Contribution = £6048

Less: Fixed Cost =£5400

Profit = £648

Calculation of incremental profit from promotion = £648 - (-£2376) = £3024

Answer (B) Calculation of break even sales

brak even slaes (units) = Fixed cost / contribution per unit

Under non promotion

=£5400 / (2.8 *45%) = 4286 units ( rounded)

Under promotion

=£5400 / (2.24*45%) = 5357 unites (rounded)

Due to promotion Break even unites shall increase From 4286 unites to 5357 units . 1071 units more in promotion

Answer (c)

Following factors that should be considered before making a decision regarding the promotion

Type of Product
Use of Product
Type of Market
Size of Market
Fund Available for Market Promotion
Complexity of Product
Purchase Quantity and Frequency

"PLEASE UPVOTE IF SOLUTION IS HELPFUL"

ekkarill92 answered 2 years ago

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