Marketing 5150

1. a.

The contribution per CD is $6.4.

Contribution per CD equates to the price of a unit minus its variable cost:

Contribution = Selling price – CD Package and disc – Song royalties – Recording royalties

= $9 – $1.25 - $.35 - $1 = $6.4

b.

It will take 80,030 CDs, or $738,000 in sales the reach breakeven.

Breakeven in CDs = Total fixed cost ($) / Contribution per CD

= (Advertising and promotion – Studio Recording Overheard) / Contribution margin per CD

= ($275,000 + $250,000) / 6.4 = 82,030 CDs

82,030 CDs x $9 = $738,300

c. The net profit is $5,875,000 for 1,000,000 CDS sold.

Net profit for 1,000,000 CDs = Adjusted contribution margin – fixed costs  

= (1,000,000 CDs x $6.4) - ($275,000 + $250,000) = $5,875,000

d.

113,281 CDs need to be sold to achieve a net profit of $200,000.

Net profit of $200,000 = (x contribution margin) – fixed costs  

$200,000 = 6.4x - ($275,000 + $250,000)

x = (725,000/6.4) = 113,281 CDs

2. a.

VCI’s contribution margin is 35%.

Contribution per unit = (Revenue – variable expenses) (per unit)

=Revenue per unit –Reproduction of copies – retailer commission – manufacturing labels – Royalties

= ($) 20 – 4 -8 -.5 -.5 = $7         

VCI’s contribution per unit is $7.

Contribution Margin = Contribution per unit / Selling price per unit

= ($) 7/20 = 35%

b.

It takes 25,000 units, or $500,000 is sales to reach breakeven.

To achieve a 20% return on investment, we need a profit relative to investment.

Required profit = Project Investment x 20% = $150,000 x 20% = $30,000

Expected sales = (Fixed cost + profit) / contribution per unit

= ($175,000 + $30,000) / $7 = 29,286 units (rounded)

Market Share (%) = Expected sales / VCI market shares x 100

= 29,286 / 100,000 x 100 = 29.29% or 29.3%

c. To achieve a profit of $30,000, VCI requires sales of 29,286 units, which is about 29.29% of the market share.

To achieve a 20% return on investment, we need a profit relative to investment.

Required profit = Project Investment x 20% = $150,000 x 20% = $30,000

Expected sales = (Fixed cost + profit) / contribution per unit

= ($175,000 + $30,000) / $7 = 29,286 units (rounded)

Market Share (%) = Expected sales / VCI market shares x 100

= 29,286 / 100,000 x 100 = 29.29% or 29.3%

3. a.

Red-Away sales need to increase by 1,700,000 units or $1,700,000.

. Quantity required to Break even = Fixed Costs / (Price – Variable Costs per unit)

= FC / contribution margin

Rash-Away Breakeven Q = $150,000 / $.6 + 1,000,000 = 1,250,000

Breakeven Ratio = Breakeven Q x P = 1,250,000 x $2 = $2,500,000

Red-Away Breakeven Q = $150,000 / $.75 + 1,500,000 = 1,700,000

Breakeven Ratio = Breakeven Q x P = 1,700,000 x $1 = $1,700,000

Rash-Away sales need to increase by 1,250,000 units, or $2,500,000.

b.

Each additional increase in advertising will lead to a $3.33 increase in sales for Rash-Away, and $1.33 for Red-Away.

Rash-Away Increases: Sales = $500,000 Advertising = $150,000

$500,000 / $150,000 = $3.33

Red-Away Increases: Sales = $200,000 Advertising = $150,000

$200,000 / $150,000 = $1.33

c.

The adjusted sales will amount to $2,700,000 for Rash-Away, and $1,557,692 for Red-Away.

Rash-Away: Adjusted price = $2 x 90% = $1.8

Adjusted contribution = $1,000,000 x .6 = $600,000

Adjusted contribution Margin Q = $600,000 / .40 = 1,500,000 units sold

Sales = $1.8 x 1,500,000 = $2,700,000

Red-Away: Adjusted price = $1 x 90% = $.9

Adjusted contribution = $1,500,000 x .75 = $1,125,000

Adjusted contribution Margin Q = $1,125,000 / .65 = 1,730,769 units sold

Sales = $.9 x 1,730,769 = $1,557,692

4. a.

Wholesalers will buy cans at a price of $.38 per can.

. Retailers cost = Product cost / (1 + Profit margin) = $.5 / 1.2 = $.42 per can.

Wholesaler cost = Retailer price / (1 + Profit margin) = $.42 / 1.1 = $.38 per can.

b.

The contribution is $.26 per unit.

Contribution = Sales – VC = $.5 – ($.18 + $.06) = $.26

c.

The breakeven for Zap will be reached at 3,407,692 units sold

Breakeven per unit = (Advertising cost + OH cost + Coupon return) / Contribution per Unit

= ($) (250,000 + 90,000 +21,000,000 x 65% / 5 x .20) / .26) = 3,407,692 units

d.

Zap will hold 16.22% of the market share.

Breakeven as % of Market share =  3,407,692 / 21,000,000 = 16.22%