Imagine that you manufacture a product that retails for $9.95. Annual retail sales of all products in this category total $300 million, a market in which your product has a 17.3% share. Retailer's margins on the product are 40% (based on the selling price to consumers) and wholesaler's margins are 8% (based on the selling price to retailers). As a manufacturer, you sell exclusively to wholesalers via your salesforce.
The manufacturing process requires $1.4 million in fixed costs and $0.86 per unit in variable costs. In addition, to sell the product, you pay an advertising budget of $2 million, shipping costs of $0.04 per unit, and a salesforce commission that is 12% of your selling price. You also pay $90,000 annually to cover the salary and expenses of a product manager. Assume that there are no additional fixed or variable costs.
Problem 1: What is your unit margin, or contribution margin (in dollars)?
Problem 2: What is your breakeven volume?
Problem 3: What is the market share (based on annual retail sales) you need in order to break even?
Problem 4: What is your annual net profit?
Problem 5: If you decided to double your advertising budget, how many additional units (beyond the current volume) would you need to sell to maintain the current dollar amount of profit?
Problem 6: If you instead decided to lower your price by 25%, how many additional units (beyond the current volume) would you need to sell to maintain the current dollar amount of profit?
Problem 7: If you instead decided to increase your salesforce commission to 15%, how many additional units (beyond the current volume) would you need to sell to maintain the current dollar amount of profit?