Question

Practice Problems for Marketing Strategy

Suppose that you have to formulate marketing strategy for a new product to be launched by Goodyear in the Midwestern region. The new tire product is called Wrangler. It provides superior traction in rain and snow, and is also very well suited for off-road driving. Goodyear is planning to sell the tires at a retail price of $150. The retailers will charge a margin of 20% on the price while the whole sellers will need a margin of 10%. It is expected that the manufacturing costs of the tires is going to be $40.00 per unit. Packaging, distribution, and miscellaneous expenses are expected to be $15.00 per unit. To manufacture the tires, Goodyear will need to use machinery and other assets that would cost $70 million every year. In an effort to increase consumer awareness, Goodyear’s advertising department has designed an advertising campaign (tagline: “When the road wrangles, drive a Wrangler”) that will cost $14 million. The company spent $15 million last year on the “Who likes Wrangler” project, which involved a simulated test market experiment to study consumer acceptance of the tire. Salespeople in the company will receive a commission of 10% for every Wrangler tire that gets sold. Salaries and other expenses for the people working for the product are expected to total $11 million. The size of the market for replacement tire market in Midwest is expected to be 30 million units this year.

Based on the above information answer the following questions for Wrangler.

1. Calculate manufacturer selling price.
2. Calculate unit variable cost.
3. Calculate total fixed cost.
4. Calculate break-even volume.
5. Calculate break-even market share%.
6. Calculate profit for Wrangler if it is able to capture 10% of the Midwest’s replacement tire market in the first year of operations.  
7. If Goodyear decides to decrease the retail price of Wrangler to $135, the product will capture 12.5% of the replacement tire market. Based on information in question 6 and question 7, which price should Goodyear charge for Wrangler?
8. Based on the information in question 6 and 7 calculate the price elasticity of Wrangler.
9. Suppose that instead of charging margins, the retailers and wholesalers want markups of 20% and 10%, respectively. Calculate the manufacturer selling price in such a case.
10. If the replacement tire market is expected to grow by 20% next year then at the end of next year what would be the profit for Wrangler (assuming it captures 10% of the market)?
11. If Goodyear spends $20 million on advertising for Wrangler then it would sell 3.5 million units of the product. Should Goodyear spend $20 million or $14 million on advertising?
12. If Goodyear does not go through the whole sellers and directly sells its Wrangler product to retailers then it will only sell 2.5 million units. Should Goodyear go through whole sellers or directly sell to the retailers?
13. If at a retail price of $150 a total of 3 million Wranglers get sold and the price elasticity of Wrangler is – 2.5, how many Wranglers will be sold at a retail price of $120?
14. A higher sales commission will motivate sales people to work even harder and reach higher sales targets. What should be sales target at a sales commission of 15% so that Goodyear makes at least the same profit as it made at a commission of 10% (assume that market share at 10% sales commission is 10%)?

If Goodyear recruits a sales team of 10 sales people for Wrangler at a fixed salary of $80,000 each then what should be the incremental sales that the sales team will have to generate to break even on the expenditure towards their salaries?

Answer 1

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