Question

PRACTICE PROBLEM Samsung has decided to manufacture a special edition cell phone called HiRide for the teen market next year that will be sold only with T-Mobile’s wireless service. Let’s assume that for this design Samsung’s manufacturing costs are $31 per phone, their fixed manufacturing costs are about $2,000,000, and their advertising and promotional costs are expected to be about $1,000,000. Samsung will make this phone exclusive to T-Mobile, who will feature it in their retail stores for sale to their customers. T-Mobile plans to charge $110 for this model, and Samsung will sell it to them for $90. Samsung salespeople earn a 10% commission on every unit they sell to a retailer.[Be sure to show all work! Partial credit may be given.]a) What is Samsung’s unit contribution on the HiRide?b) What are Samsung’s total fixed costs?c) What is Samsung’s break even volume in units?d) What is T-Mobile’s margin percentage?e) If Samsung winds up selling 80,000 units, how much profit will they earn? Keep in mind that profit is the difference between total revenues and total costs.

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Answer 1

Given : Manufacturing Cost = $2,000,000

Promotional Cost = $1,000,000

Manufacturing cost per phone = $31

Answer (a) : Total cost for Samsung = 2000000 + 1000000 + 31*Q = 3000000 + 31*Q
Samsung’s unit contribution on the HiRide = 3000000/Q + 31

Answer (b) :Samsung’s total fixed costs = Manufacturing Cost +Promotional Cost

Samsung’s total fixed costs = $3,000,000

Answer (c) : Revenue for Samsung = 90*Q + 0.1*110*Q = 101*Q
Break even volume is found when revenue is equal to cost
Therefore, 3000000 + 31Q = 101Q
3000000 = 70Q
Samsung’s break even volume in units, Q = 42858

Answer (d) :T-mobile's margin percentage = 20/110 * 100
T-Mobile’s margin percentage = 18.18%

Answer (e) : Profit at 80,000 units = 101*80000 - 3000000 - 31*80000
= 70 * 80000 - 3000000
Total Profit earned if Samsung winds up selling 80,000 units =  $2600000

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