1. Variable Costs and Fixed Costs Problem
OUV has spent $2,000,000 in R&D to develop a new product. The company plans to sell the product for $10 per unit. It will cost $2 in materials and $1 in labor to produce each unit. OUV plans to run an advertising campaign at a cost of $20,000. The advertising campaign will include a $2 coupon inserted in Sunday newspapers. OUV expects 15% of its sales to be made with a coupon. It also plans to send a postcard to 5,000 customers on a mailing list at a cost of $.50 each. OUV plans to hire one sales representative at a salary of $50,000 per year plus a 5% commission. OUV's rent and utilities will be $15,000 per month, and its administrative and clerical expenses are budgeted at $120,000 per year.
- What are the relevant annual fixed costs?
- What are the variable costs per unit?
2. Gross Margin Problem
Imagine a situation where a company sells 100 units of a product at a price of $1.00 per unit and with COGS of $0.40 per unit.
- What is the company's gross profit margin in dollars?
- What is the company's unit contribution in dollars?
- What is the company's contribution margin percentage?
3. Trade Margin Percent of Selling Price Problem
Suppose a manufacturer suggests a retail list price of $6.00 on an item, and the manufacturer's COGS are $2.00 per unit. The channel of distribution includes wholesalers and retailers. The wholesalers have a policy of obtaining a 20% margin based on selling price, and retailers have a policy of obtaining a 40 percent margin based on selling price.
- What price will the wholesaler sell the item to the retailer?
- What price will the manufacturer sell the item to the wholesaler?
- What is the manufacturer's gross margin percentage?
4. Trade Margin Markup over Cost Problem
Suppose a manufacturer's COGS are $2.00 per unit. The channel of distribution includes wholesalers and retailers. The manufacture has a policy of obtaining a 30.6% markup over cost, wholesalers have a policy of obtaining a 20% markup over cost, and retailers have a policy of obtaining a 40 percent markup over cost.
- What price will the manufacturer sell the item to the wholesaler?
- What price will the wholesaler sell the item to the retailer?
- What price will the retailer sell the item to the consumer?
5. Margin Analysis Problem
The ZYX Company makes a product that costs $3 to produce, is sold to retailers for $5, and has a Manufacturer's Suggested Retail Price (MSRP) of $10. The PQR Company makes a product that costs $2.50 to produce, is sold to retailers for $4, and has a MSRP of $8. The ZYX Company is considering the introduction of a second product. This product will have a Unit Price of $4.50, will cost $2.25 to produce, and will have a MSRP of $8.25.
Complete the margin analysis table below.
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ZYX Product 1
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ZYX Product 2
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PQR Product
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Retail Price
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Retailers' Unit Contribution
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Retailers' Gross Margin Percentage
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Manufacturer's Unit Price
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Manufacturer's Unit Variable Cost
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Manufacturer's Unit Contribution
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Manufacture's Gross Margin Percentage
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- Based on margin analysis, what product will ZYX prefer consumers buy, its higher priced Product 1 or its lower priced Product 2?
- Based on margin analysis, what product will retailers prefer customers buy?
- Based on margin analysis, is the retailer more likely to promote ZYX's Product 2 or PQR's Product?
6. Pro Forma Income Statement Problem
Sales for the upcoming year are forecasted to be 100,000 units. The product is priced at $10 per unit. The product contains $0.35 of materials per unit and costs $0.15 per unit to assemble. One ad will run for the product each month at a cost of $7,500 per ad. There are two sales people each earning a base salary of $35,000 per year plus 10% commission. The product is shipped in cases of 100 at a cost of $40 per case to deliver. Administrative salaries total $120,000; depreciation will be $20,000; and interest, property taxes, and other administrative expenses are forecasted at $5,000 each.
7. Complete the pro forma income statement below.
Pro Forma Income Statement for the 12-Month Period
Ended December 31, 20XX
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Sales
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$
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%
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Cost of goods sold
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_________
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%
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Gross margin
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$
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%
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Marketing expenses
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Sales expenses
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$
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%
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Advertising expenses
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%
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Freight or delivery expenses
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%
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%
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General and administrative expenses
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Administrative salaries
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$
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%
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Depreciation
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%
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Interest expense
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%
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Property taxes and insurance
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%
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Other administrative expenses
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%
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%
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Net income (before income tax)
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$
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%
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- Marketing expenses represent what percentage of sales?
- What is the projected net income?
8. Total Breakeven Value Problem
The ZYX Company makes a product that has a MSRP of $9 and gives retailers a $4 profit margin. The unit variable cost is $3. Fixed costs include $17,000,000 for consumer advertising, $5,000,000 for consumer promotion, $12,000,000 for trade promotion, a $20,000,000 sales force budget, and $6,000,000 for general and administrative expenses.
- What is the breakeven volume in units for ZYX?
- What is the breakeven dollars for ZYX?
9. IBEV for Change in Fixed Cost Problem
The ZYX Company makes a product that has a MSRP of $9 and gives retailers a $4 profit margin. The unit variable cost is $3. The ZYX Company is considering a $15,000,000 increase in its advertising budget.
What is the breakeven volume in units for the increase in advertising?
10. IBEV for Change in Contribution Problem
Assume that the ZYX Company normally sells 90,000,000 units and is considering a price cut from $5.00 to $4.50 on its product.The unit variable cost of the product is $3.
How much must sales increase in units in order for ZYX to breakeven on the price cut?
11. IBEV for Complex Changes Problem
Assume that the ZYX Company normally sells 90,000,000 units and is considering a price cut from $5.00 to $4.50 on its product.The unit variable cost of the product is $3. At the same time, ZYX plans to increase advertising by $15,000,000.
How much must sales increase in units in order for ZYX to breakeven these changes?
12. Segment Value Problem
The ZYX Company makes a product that has a MSRP of $9 and gives retailers a $4 profit margin. ZYX's product sells at a premium; the average retail price for the industry is only $7. The unit variable cost for ZYX is $3. The target market for the ZYX Company is baby boom adults in the U.S. population. Baby boomers are individuals born between 1946 and 1964 and comprise approximately 24 percent of the U.S. population. There are approximately 300 million people in the U.S. population. Eighty percent of baby boomers consume at least one unit/year in ZYX's product category, and, among these, the average usage rate is five units/year.
- What is the market size in units?
- What is the market size in revenue in retail dollars?
- What is the segment value of the product category for ZYX?
13. Market Share Problem
The ZYX Company makes a product that has a MSRP of $9 and gives retailers a $4 profit margin. Assume that the ZYX Company normally sells 90,000,000 units. ZYX's product sells at a premium; the average retail price for the industry is only $7. The unit variable cost for ZYX is $3. The target market for the ZYX Company is baby boom adults in the U.S. population. Baby boomers are individuals born between 1946 and 1964 and comprise approximately 24 percent of the U.S. population. There are approximately 300 million people in the U.S. population. Eighty percent of baby boomers consume at least one unit/year in ZYX's product category, and, among these, the average usage rate is five units/year.
What is the retail revenue market share for ZYX?
14. Breakeven Market Share Problem
The ZYX Company is considering two new products and needs to decide which one to launch. Both products have the same price and cost structure. Both products will have a selling price of $5. The unit variable cost for either product will be $3, and fixed costs for either product will be $2,500,000. Both products are sold through retailers. The market for Product 1 is estimated to be 25,000,000 in units.The market for Product 2 is estimated to be $500,000,000 at retail. Retailers for Product 2 have trade margins of 40% based on price.
Calculate revenue breakeven market shares for both products so that these values can be used by management to decide which product to launch.
- What is the dollar breakeven market share for Product 1?
- What is the dollar breakeven market share for Product 2?
- Based on breakeven market share, which product should they launch?
15. Cannibalization Problem
Brand X currently has an opaque white toothpaste on the market and is planning to introduce a new gel toothpaste. The opaque white toothpaste sells for $1.00 a tube with unit variable costs of $0.20 per tube. The new gel toothpaste will sell for $1.10 a tube with unit variable costs of $0.40 per tube. The company expects to sell 1 million units of the new gel toothpaste in the first year. Of that amount, 500,000 units will be diverted from the opaque white toothpaste, of which the company had expected to sell 1 million units.
How will the introduction of the new gel toothpaste affect Brand X's total contribution dollars?
16. BECR Problem
The ZYX Company sells a product for $5 per unit with unit variable costs of $3. It is considering the introduction of a second product. This new product will not require additional promotional expenditures (fixed costs). It will have a Unit Price of $4.00 and cost $2.50 to produce.
What is the BECR for the new product?