1. Mee-3 produces and markets MP3 players. Management is thinking about developing a new model with wireless speakers: the Mee-Stream. The Mee-Stream will cost approximately $75 per unit to produce, and will be sold to retailers at $120, with a suggested retail price (i.e., the amount paid by consumers) of $199. Mee-3 estimates that it will incur annual fixed costs of $5 million to advertise and promote the Mee-Stream, and another $6 million to cover selling and distribution expenses. Based on this information, how many units does Mee-3 need to sell in order to break even?
2. If Mee-3 sells 300,000 units of the Mee-Stream in a given year how much profit (or loss) would it realize?
3. If Mee-3 were to spend an additional $1.5 million on advertising and/or sales and distribution (i.e., on top of the fixed costs specified in #1), how many additional units would it have to sell to break even?
4. If Mee-3 were to lower the wholesale price to $99 (i.e., the amount paid by retailers), so that it could reduce the suggested retail price to $150, how many additional units would it have to sell in order to earn the same amount of profit as in #2? (Use the information from problems #1 and #2.)
5. KidCo has produced a new game for young children, which it calls PlanetKid. It costs KidCo $30 to produce and package each game. KidCo sells the game to various retailers (e.g., toy stores and discount stores), and sets its price to achieve a 40% markup on cost. If these retailers, in turn, calculate their selling price based on a 45% markup on the retail price how much will a consumer pay for the game? (Hint: make sure that you understand the difference between markup on cost and markup on retail.The following two questions do not require any calculations. Rather, you are asked to discuss and explain.
6. Consider the case of two furniture manufacturers; Company A is relatively large (annual sales = $700 million), whereas Company B is smaller (annual sales = $85 million). Company A produces leather and upholstered sofas, chairs, recliners, and sectionals, as well as end tables, cocktail tables, and sofa tables. Company B produces a more limited assortment of sectionals and recliners only. Neither company has its own retail stores; instead, both sell to independent furniture and department stores across the U.S. They differ, though, in their sales and distribution methods. Company A employs approximately 100 salespeople who sell direct to furniture retailers and department stores, and has its own fleet of trucks and distribution centers. Company B, however, sells its products to retailers via manufacturer agents and independent distributors. Your question is this: Why do the distribution channels of these two companies vary? Explain.
7. El Nacho Foods produces frozen dinners which are sold in the freezer section of supermarkets. El Nacho is positioned as a high quality brand of frozen Mexican dinners, and prices its brands accordingly. Sales have increased steadily, and over the years El Nacho Foods had been very profitable. Things were going well until recently, when two rival brands lowered their prices. El Nacho has lost market share, and its profits are decreasing. In order to regain market share, some executives at El Nacho suggested that they should lower their prices. Others suggested that they should spend more money on advertising. Before making a decision what should the folks at El Nacho consider? Discuss and explain.