Question

You are the marketing manager for TotalControl, an electronics company in Orangeburg. Your company produces a line of remote controls for use in home theaters. The company’s main product, the UR 1000, sold 5000 remotes via internet sales this year. Sales of the product are expected to grow to 6000 next year. The UR 1000 remote sells for $89 each. The company is considering expanding its product line by introducing a new remote with touchscreen controls, the UR 9000T. This remote will sell for $199 and would be sold through retailers like Best Buy. A similar remote, the UR 8000, with slightly different features and styling would be sold direct to consumers via the internet for $159. If TotalControl decides to market the other two remotes, in addition to the UR 1000, it must market both the 8000 and the 9000T. The following information applies to this scenario:

UR 1000 factory labor = $20/unit

UR 1000 raw materials = $15/unit

Current administrative overhead = $120,000

Current advertising = $50,000

Website maintenance = $10,000

Best Buy retailer's margin = 12%

UR 9000T factory labor = $20/unit

UR 9000T raw materials = $40/unit

UR 8000 factory labor = $20/unit

UR 8000 raw materials = $40/unit

Packaging (all remote models) = $5/unit

Additional Advertising for UR 8000 and 9000T = $50,000

Additional administrative overhead for the UR 8000 and 9000T =$10,000

Questions:

a. What is the contribution per unit for the UR 1000?

b. What is the break-even volume in units and dollars for the UR 1000?

c. What is the current net contribution for the UR 1000?

d. The UR 8000 is expected to sell 1,000 units in its first year. Ten percent of this first year volume will be cannibalized from UR 1000’s projected volume. The UR 9000T is expected to sell 800 units with 400 of these units cannibalized from the UR 1000. What is the net financial impact of introducing the two new remotes to TotalControl’s product line?

E. Referring to the UR 1000 product only, if TotalControl decided to sell half of its products directly to consumers via the Internet and half to consumers via retailers like Best Buy, how many units would they have to sell to break-even?

Answer 1

To find out the Contribution per Unit for the UR 1000 it is we will have to remove the variable cost from the selling price of the UR 1000.

Variable cost are those whose cost varies with production level

Answer 1: UR 1000

Selling price per unit $89

Variable cost per Unit :

Raw material Per Unit : $15

Factory labor per unit : $20

Packaging cost : $5

Contribution Per Product : $89 - $40 = $49 per unit

Answer 2: Break even volume :

Fixed costs = Administrative overhead + Advertising cost + Advertising

Selling price * no of units = Fixed costs + Variable costs * No of Units

89 * X = (120000 + 10000 + 50000) + 40 * X

On Solving this you will get

X = 180000/49

X = 3674 units is the break even volume

Answer 3: Current net Contribution for the UR 1000 5000 units sold

No of units * Contribution margin

5000 * $ 49 = $245000

Answer 4:

	UR9000T	UR8000	UR1000
No of units	800	1000	5500
Selling Price	199	159	89
Variable Cost
Labor/unit	20	20	20
Raw Material	40	40	15
Packaging cost	5	5	5
Retailer Margin	23.88	0	0
Contribution Margin	110.12	94	49
Fixed costs
Advertising	100000
Website maintenance	10000
Administrative Overhead	130000
Revenue	159200	159000	489500
Variable Cost	21914	14946	4361
Fixed costs	240000
Net Profit	526479

So next year after introducing these two product lines we will get a net profit of $526479

last year net profit was $65000

So net Financial Impact is $526479 - $65000 = $461479

Answer 5 : UR1000 if half are sold through retailers

Then one more cost of retailer will add up.

After this variable cost will become $89 * 0.12 =$10.68

But only half are sold through retailer so on averaging fpr every unit sold it will be $5.34

Using break even Formula

89*X = 180000 + 45.34 * X

X = 4123 will be the new break even volume considering UR 1000 alone