Question

Susan is Product Manager for Snuggies Disposable Diapers. Her company is introducing a new line of children’s diapers which are available in designer labels such as Christian Dior and Versace.

As Susan prepares for her sales presentation, she determines several different levels of pricing…first, her price to the buyer at Gymboree, based on her cost and margin requirements. Then, her price and margin based the cash discount she knows Gymboree will ask for, and take!

Finally, she seeks to determine what Gymboree’s margin on their resale of the product will be, based on Snuggies’ suggested retail price.

The cost of one box of "Designer Diaper Duds" is:      $4.00

Snuggies Corporate Gross Margin Requirement is:           45% (.45)

With this cost and margin requirement, what price should Susan charge Gymboree for a box of Designer Diaper Duds?

Susan plans to offer Gymboree a special discount of 5% (0.05). Based on the price you have just calculated, how much will Gymboree's NET price be after the 5% discount? 6.91

Answer 1

The cost of one box of Diapers = $4.00

Since corporate wants to make a profit margin of 45%, they diapers need to be sold ultimately at a price of no less than = 4 + 0.45*4 = $5.80

Since Susan plans to give Gymboree a 5% discount, she will need to markup the price a little. Let this marked up price be x. Therefore:

0.95x = 5.80

x = $6.11

Hence Susan will charge $6.11 per box and Gymboree will end up paying a net $5.80 per box after the discount.

NOTE: The question is a bit misleading especially with the last line which makes it ambiguous whether corporate is supposed to make a profit of 45% even after Susan provides the 5% discount or if the initial price is the offered sale price and 5% discount is provided. Logically it should be the former for which I have solved. However, in case it is the latter, here is the modified solution:

Susan will charge = $5.80 per box of diapers

Gymboree will pay a net = 0.95*5.80 = $5.51 per box of diapers