Question

Product X is a consumer product with a retail price of $12.95. Retailers margins on the product are 40% and wholesaler’s margins are 8% (based on the selling price).

Total retail size of the market in which Product X competes is $425MM (MM stands for millions), and Product X’s market share (in dollars) is 21.3%.

Manufacturing fixed costs of Product X are $1,400,000 and the variable costs are $.86 per unit. Product X spends $2,000,000 a year on advertising, and has miscellaneous variable costs (shipping and handling) of $.04 per unit. It pays its sales people completely on commission at 12% of the manufacturer’s selling price (not retail price!). Lastly, X’s Product Manager has a salary of $90,000 a year. Calculate the following:

5. Calculate the annual net profit in dollars for Product X (hint: remember that for every unit sold over the breakeven volume the company makes a profit equal to the contribution margin of that unit)

6. Suppose Product X doubles its ad spending but still wants to maintain its current net profit (note, this current profit is the answer from Q5). Calculate the difference in total # of units needed to cover the increase in ad spending while maintaining the same profit. (hint: calculate the new # of units needed and subtract the base case # of units sold which was the answer to Q4)

7. Suppose Product X reduces the manufacturer selling price by 25%. Calculate the difference in total # of units needed to maintain its current profit level (Q5) compared to its base case unit volume. (hint: same as in Q6. Calculate the new # of units needed to maintain that profit level with the lower manufacturer’s selling price and subtract the base case # of units sold from Q4)

8. Suppose Product X changed its sales commission to 15% of manufacturer selling price. Calculate the difference in total # of units needed to cover this increased commission while maintaining the same profit. (same hint as above. You will also use the manufacturer selling price you had to calculate in Q1 to arrive at the new VC and new contribution margin)

Answer 1

Particulars	Amount	Per Unit
Retail Sales	90,525,000.00
	(425MM x 21.3%)
Retail Sales (in units)	6,990,347.49
Wholesaler Sales	54,315,000.00
	(90525000 x 60%)
Manufacturer Sales	49,969,800.00	7.15
	(54315000 x 92%)
Variable Expenses:
Variable Manufacturing Cost	6,011,698.42
	(6990347 x 0.86)
Shipping and Handling	279,613.88
	(6990347 x 0.04)
Selling Commision	5,996,376.00
	(49969800 x 25%)
Total Variable Expenses	12,287,688	1.76
Contribution	37,682,112	5.39
Fixed Expenses :
Manufacturer Fixed Cost	1,400,000.00
Advertising	2,000,000.00
Manager's Salary	90,000.00
Total Variable Expenses	3,490,000.00	0.50
Net Profit	34,192,112	4.89

Q5. Net Profit = $ 34,192,112

Q6.

Contribution per Unit = Total Quatity / Total Units = 37682112 / 6990347 = 5.39

Units Sold need to increase to cover additional ad expenses = Additional Ad cost / Contribution per unit

= 2,000,000 / 5.39

= 371017 units

Q7.

Revised Price = 7.15 x 25% = $5.36

Contribution with Revised Price = 5.36 - 1.76 = 3.60

Total Units to be sold for original total contribution = Original Contribution / Revised Contribution per unit

= 37682112 / 3.6

= 10,463,475 Units

Difference in Unit Sold = 10463475 - 6990347 = 3,473,128 Units

Q8.

Manufacturer Sales	49969800.00	7.15
Variable Expenses:
Variable Manufacturing Cost	6011698.42
Shipping and Handling	279613.88
Selling Commision	7495470
Total Variable Expenses	13786782.30	1.97
Contribution	36,183,018	5.18

Difference in units = (Original Total Contribution - Revised Total Contribution) / Revised Cont. per unit

= (37,682,112 - 36,183,018) / 5.18

= 289400 Units

Upvote if you Like my answer.