In: Operations Management
Mike Foster, marketing manager for Big Time Sports
Products, Inc. (BTSP), is thinking about
how the changes taking place among retailers in his channel might
impact his strategy.BTSP is a producer of
different lines of sports products. Mike is looking for alternative
ways to make money.
Mike is considering a new strategy to increase sales of tennis
balls and a new tennis rack. The basic idea is to sell tennis balls
in large quantities to nonprofit groups who resell the balls to
raise money. For example, a service organization at a local college
bought 2,000 tennis balls printed with the college logo.
BTSP charged $.50 each for the tennis balls-plus a
$500 one-time charge for the stamp to print the logo. The service
group plans to resell the tennis balls for $2.50 each and
contribute the profits to a shelter for the homeless.
Questions (10pts.)
What is the service organization's average costper printed tennis
ball? __________________________
What is the total profit the service group hopes to make if it sells all 2000 tennis balls at $2.50 per ball.__________________.
BTSP is considering adding tennis racquets to
the product lines it produces. This would require a $500,000
modification to its factory as well as the purchase of new
equipment that costs $1,500,000. The variable cost to produce a
tennis racquet would be $45, but Mike thinks that
BTSP could sell the racquet at a wholesale price
of $60. However, Dr. Pointer thinks that the tennis racquet is a
superior product and thatBTSP should sell it
for$99.99 to upscale country clubs only. The higher
price would give a prestige image. However, if
BTSP sells the racquet at the lower price, many
other retailers might decide to carry it.
Questions (15 pts)
If BTSP produces tennis racquets, how many racquets must it sell at $60.00 and $99.99 to break even? Breakeven units at 60.00 _______________________________.
Breakeven units at 99.00 _______________________________.
Which price do you recommend and why? __________________________
Question (5 pts)
If BTSP wants to make at least $35,000 profit off the racquets,
at a selling price of $60.00 what would the breakeven
quantitybe__________________________
PLEASE SHOW WORK
First Part - Tennis Balls
Service organisation paid $500 as one time cost for printer stamp. If this $500 is considered to be distributed equally over 2000 balls, cost per ball comes out to be 500/2000 = $0.25/ball
So total cost per printed ball = cost per ball + cost for printing = $0.5 + $0.25 = $0.75/ball
Total buying cost of service organisation = 2000*0.75 = $1500
Total revenue from selling = 2000*2.5 = $5000
So profit generated = revenue - cost = $5000 - $1500 = $3500
2nd Part : Racquets
Breakeven units at 60 :
Breakeven units = Fixed cost/(Selling price - variable cost per unit)
Here fixed cost is $15,00,000 + $5,00,000 = $20,00,000
variable cost per unit = $45
So, break even units = = 1,33,334 units
Breakeven units at 99 :
Fixed cost and variable cost per unit is same as above.
So, breakeven quantity = = 37037 units
To recommend a price, lot of other data is needed like market price, market size for both situations etc. It is not possible to say which is a better cost just on the basis of the break even units. It is possible that we price it at 99 and there is no one to buy 37037 units of the racquet and we might end up in loss.
Breakeven Quantity for 35000 profit
Let the quantity be Q
60*Q = 20,00,000 + 45Q + 35000
Q = 2035000/15
or Q = 1,35,667
Hope it helps!