Question

2.Executives of Vitagen, a pharmaceutical manufacturer, are preparing to introduce Betatron, a new vitamin into the market. The following cost information pertains to Betatron:

Chemical compound $1.25/bottle

Packaging/labeling $0.35/bottle

Developer royalties’ $1.00/bottle

Advertising and promotion $675,000

Vitagen overhead $500,000

Selling price per bottle to distributor $9.00

Calculate the following:

1. Contribution per bottle

2. Break-even volume in bottle and dollars

3. Net profit if 1 million bottles are sold

4. Necessary unit volume to achieve a $200,000 profit

3. Satellite Imaging (SD) is considering launching a new satellite receiver that will be sold through major electronic retailers in the US. The initial investment that SD will need to invest if they develop the Xgen1 is $7.8 million. Research suggests that high-end electronic consumers are willing to pay $695 for the HD receiver/DVD recorder. The mark-up for retailers is 28% on selling price, while wholesalers earn a margin of 9%. Other data concerning the Xgen1 are as follows.

Advertising/promotion	$875,000
Overhead	$533,000
Packaging	$4.865/unit
Components	$197.56/unit
Assembly of components	$92.56/unit
Supplemental goods (manual, cables, etc)	$3.292/unit

Calculate the following:

1. Retailer cost

2. Wholesaler cost

3. Contribution per unit

4. Contribution margin

5. Break-even unit volume

4. For each brand in the following table, calculate the manufacturer’s selling price (MSP), the contribution per unit, and the contribution margin as a percentage of MSP. Promotional allowances are considered a variable cost.

	Brand X	Brand Y
MSRP	$5.29	$4.99
Volume Discount	30%	35%
Promotion Allowance	15%	12%
Unit Cost	$1.18	$0.74
MSP
Contribution per Unit
Contribution Margin

5. For large retailers, the MSP represents their product cost, which they will mark up to set the retail price. If the retailer has a target margin of 25%, what would the retail prices be for the brands in question 4?

Brand X Retail Price

Brand Y Retail Price

6. Many small retailers will buy through a wholesaler instead of buying direct from the manufacturer.

1. Given the pricing policy for Brand X in question 4, what would be the wholesaler’s selling price (WSP) if the wholesaler has a desired margin of 15%?

2. If the retailer has a desired margin of 30%, what would the retail price be?

3. What volume discount would the manufacturer have to offer for the retailer to price at MSRP?

7. The group product manager for ointments at American Therapeutic Corporation was reviewing price and promotion alternatives for two products: Rash Away and Red-Away. Both products were designed to reduce skin irritation, but Red-Away was primarily a cosmetic treatment whereas Rash-Away also included a compound that eliminated the rash. The price and promotion alternatives recommended for the two products by their respective brand managers included the possibility of using additional promotion or a price reduction to stimulate sales volume. A volume, price, and cost summary for the two products follows:

	Rash-Away	Red-Away
Unit price	$2.00	$1.00
Unit variable costs	$1.40	$0.25
Unit contribution	$0.60	$0.75
Unit volume	1,000,000 units	1,500,000 units

Both brand managers included a recommendation to either reduce price by 10 percent or invest an additional $150,000 in advertising.

1. What increase in unit sales and dollar sales will be necessary to recoup the incremental increase in advertising expenditures for Rash-Away? For Red-Away?

2. How many units would have to be sold at the lower price to maintain the same level of total contribution for Rash-Away? For Red-Away? What is the increase in unit sales and dollar sales for Rash-Away? For Red-Away?

3. Which is the better option for Rash-Away? For Red-Away?

8. Suppose a firm’s effective growth rate were 15 percent. What customer acquisition rate would be required if customer retention were:

1. 80 percent?

2. 95 percent?

9. A cable company spends on average $600 to acquire a customer. Over time, 80% of customers remain with the company from one year to the next. The discount rate is 12%. Costs to serve each customer are: annual maintenance costs - $45; annual record-keeping and billing costs - $30. Revenue is as follows:

	Price per Month	% of Customers
Basic Service	$30	50%
Premium Service	$50	40%
Super Premium Service	$80	10%

1. What is the annual profit margin for an average customer?

2. What is the CLV for an average customer?

3. What is the CLV for a Super Premium customer?

10. ABC Company estimates that sales will be approximately $5,000,000 in the next fiscal year. They expect their salespeople will sell $265,000 per year on average, with approximately 895 selling hours per year. ABC Company estimates that it will take a total of approximately 19,100 selling hours to reach their sales goal. What size salesforce will ABC require:

1. Based on the breakdown method?

2. Based on the workload / buildup method?

Answer 1

	a	Selling Price per bottle		$9.00
		Variable Costs per per bottle:
	b	Chemical compound	$1.25
	c	Packaging/Labeling	$0.35
	d	Developer royalties	$1.00
	e=b+c+d	Total Variable costs		$2.60
	f=a-e	Contribution per bottle		$6.40
		Break even volume in units =Fixed costs/Unit Contribution
		Fixed Costs:
	g	Advertising and promotion	$675,000
	h	Overhead	$500,000
	i=g+h	Total Fixed Costs	$1,175,000
	j=i/f	Break even volume in bottles	183,594	(1175000/6.4)
	k=j*a	Break even volume in dollars	$1,652,346	(183594*9)
		Net Profit if 1 million bottles are sold:
	A	Sales Quantity	1,000,000
	B=A*9	Sales Revenue	$9,000,000
	C=A*2.6	Total Variable Costs	$2,600,000
	D=B-C	Total Contribution Margin	$6,400,000
	E	Total fixed Costs	$1,175,000
	F=D-E	Net Profit	$5,225,000
		Unit Volume to achieve $200000 profit
	G	Break even volume in units	183,594
	H	Profit at Break even volume	$0
	I	Contribution per unit	$6.40
	J	Required Profit	$200,000
	K=J/I	Number of units to be sold above break even	31,250
	L=G+K	Unit Volume to achieve $200000 Profit	214,844