Question

Marketing Arithmetic Exercise #2

Joe Stich has just become product manager for Brand X. Brand X is a consumer product with a retail price of $1.00.  Retail margins on the product are 33%, while wholesalers take a 12% margin. Brand X and its direct competitors sell a total of 20 million units annually; Brand X has a 24% share of this market.  Variable manufacturing costs for Brand X are $0.09 per unit.  Fixed manufacturing costs are $900,000.  The advertising budget for Brand X is $500,000.  The Brand X product manager's salary and expenses total $35,000.  Salespeople are paid entirely by a 10% commission.  Shipping costs, breakage, insurance and so forth are $0.02 per unit.

1.   What is the unit contribution for Brand X?

2.   What is Brand X's break-even point?

3.   What market share does Brand X need to break even?

4.   What is Brand X's profit impact?  [Note profit impact = total contribution – fixed costs]

5.   Industry demand is expected to increase to 23 million units next year.  Mr. Stich is considering raising his advertising budget to $1 million.

5a.   If the advertising budget is raised, how many units will Brand X have to sell to break even?

5b.   How many units will Brand X have to sell in order for it to achieve the same profit impact that it did this year?

5c.   What will Brand X's market share have to be next year for its profit impact to be the same as this year?

5d.   What will Brand X's market share have to be for it to have a $1 million profit impact?

6.   Upon reflection, Mr. Stich decides not to increase Brand X's advertising budget. Instead, he thinks he might give retailers and incentive to promote Brand X by increasing their margins from 33% to 40%.  The margin increase would be accomplished by lowering the price of the product to retailers. Wholesaler margins would remain at 12%.

6a.   If retailer margins are raised to 40% next year, how many units will Brand X have to sell to break even?

6b.   How many units will Brand X have to sell to achieve the same profit impact next year as it did this year?

6c.   What would Brand X's market share have to be for its profit impact to remain at this year's level.

6d.   What would Brand X's market share have to be for it to generate a profit impact of $350,000?

Answer 1

	1	Unit contribution of Brand X
		Retail Price	$1.00
		Retail Margin	33%
		Retail Profit	$0.33	(1.00*33%)
		Retail Cost	$0.67	(1-0.33)
		Wholesale Margin	12%
		Wholesale Profit	$0.08	(0.67*12%)
		Wholesale Cost	$0.59	(0.67-0.08)
		Manufacturers Selling Price per unit	$0.59
		Variable manufacturing cost per unit	$0.09
		Variable cost of commission per unit	$0.06	(10%*0.59)
		Variable shipping cost brokerage etc	$0.02
		Total Variable cost per unit	$0.17	(0.09+0.06+0.02)
		Unit contribution of Brand X	$0.42	(0.59-0.17)
	2	Break even point in unit=Total Fixed Costs/Unit Contribution
	a	Fixed Manufacturing Cost	$900,000
	b	Advertising cost	$500,000
	c	Product manager's Salary and expenses	$35,000
	d=a+b+c	Total Fixed Costs	$1,435,000
	e	Unit contribution of Brand X	$0.42
	f=d/e	Break Even Point	3,411,468
	3	Market Share Needed for break even
	g	Total market demand	20,000,000
	f	Break Even Point	3,411,468
	h=f/g	Market Share Needed to break even	0.170573412
		Market Share Needed (Percentage)	17%
	4	Profit Impact
	j	Sales Quantity=24% *20 million	4,800,000
	e	Unit Contribution	$0.42
	k=j*e	Total contribution	$2,019,072
	d	Fixed Costs	$1,435,000
	l=k-d	Profit Impact	$584,072