A Ballpoint Pen Manufacturer - Essay Example

Exercise A ballpoint pen manufacturer had the following information: Plastic tubes: top and tip – 0.12 per unit Ink – 0.02 per unit Direct Labor – 0.02 per unit Selling price – 0.4 per unit Advertising - $80,000 Managerial and secretarial salaries - $200,000 Salespeople’s commissions – 10 per cent of selling price Factory overheads - $120,000 Total available ballpoint pen market is 10 million pens (near this selling price). Calculate: a) unit contribution Unit contribution margin:             Unit selling price 0.40 Less: Unit variable costs     Plastic tubes 0.12     Ink 0.02     Direct labor 0.02     Sales commission 0.04     Total unit variable costs 0.20 Unit contribution margin 0.20               b) break-even volume in units Break-even volume in units             Fixed costs     Advertising 80,000.00     Managerial and secretarial salaries 200,000.00     Factory overheads 120,000.00     Total fixed costs 400,000.00 Divide by: unit contribution margin 0.20   Break-even volume in units 2,000,000.00               c) share of total market to break even Share of total market to break-even     Industry sales @ 0.40 4,000,000.00 Breakeven sales 800,000.00   Market share 0.20         d) total profit for the company if three million pens are sold If three million pens are sold, total profit:           Sales @ 0.40/unit 1,200,000.00 Less: Variable costs     Plastic tubes @ 0.12/unit 360,000.00     Ink @ 0.02/unit 60,000.00     Direct labor @ 0.02/unit 60,000.00     Sales commission @ 0.04/unit 120,000.00     Total variable costs 600,000.00 Contribution margin 600,000.00 Less: Fixed costs     Advertising 80,000.00     Managerial and secretarial salaries 200,000.00     Factory overheads 120,000.00     Total fixed costs 400,000.00 Net income 200,000.00               e) volume in units required to generate $500,000 profit Income of 500,000, volume in units           Target income 500,000.00 Add: Fixed costs     Advertising 80,000.00     Managerial and secretarial salaries 200,000.00     Factory overheads 120,000.00     Total fixed costs 400,000.00 Target income + total fixed costs 900,000.00 Divide by: unit contribution margin 0.20   Volume in units required to earn target income 4,500,000.00               Exercise 5 Last year, consumers spent $1,200,000 on product called Wipe-it-Clean. Wipe-it-Clean costs a retailer $2 and normal retail margins are 33% for this kind of product. The manufacturer of Wipe-it-Clean is about to launch a nation-wide advertising campaign which will bring its fixed costs up to $200,000. Wholesaler margins are 25 percent and manufacturing margins are 66%. Margins are calculated as a percentage of each company’s own selling price. What market share must Wipe-it-Clean capture for the manufacturer to break even? What market share must Wipe-it-Clean capture for the manufacturing to achieve a profit of $150,000?         amount % of selling price cumulative %   Manufacturer Cost 0.51 34.00% 17.09%     Markup 0.99 66.00% 33.17%     Selling price 1.50 100.00% 50.25% 50.25%     Wholesaler Cost 1.50 75.00% 50.25%     Markup 0.50 25.00% 16.75% 16.75%   Selling price 2.00 100.00% 67.00%       Retailer Cost 2.00 67.00% 67.00%     Markup 0.99 33.00% 33.00% 33.00%   Selling price 2.99 100.00% 100.00% 100.00%             Break-even volume in units:                 Fixed costs     Advertising 200,000.00   Divide by: unit contribution margin 0.99     Break-even volume in units 202,020.20       Share of total market to break-even       Industry sales 1,200,000.00   Breakeven sales 200,000.00     Market share 0.17                                       Volume in units, target income 150,000       Target income 150,000.00   Add: Fixed costs     Advertising 200,000.00   Target income + fixed costs 350,000.00   Divide by: unit contribution margin 0.99     Volume in units required to earn target income 353,535.35       Share of total market to earn target income       Industry sales 1,200,000.00   Required sales 350,000.00     Market share 0.29                     Exercise 6 The manufacturing costs, all available, for a product are $1.5 per unit. Wholesaler margins are 50 percent ad retailer margins are 75 percent (both calculated as a percentage of their respective selling prices). The manufacturer wants to make a minimum of $100,000 profit over and above fixed costs of $50,000. What will be the minimum retail selling price if the manufacturer produces only 10,000 units? CVP analysis for manufacturer:               Minimum profit required 100,000.00 Add: Fixed costs 50,000.00 Minimum profit required + fixed costs 150,000.00 Divide by: Volume of units produced 10,000.00 Required margin 15.00     Manufacturer Cost 1.50 9.09%     Markup 15.00 90.91%     Selling price 16.50 100.00%       Wholesaler Cost 16.50 50.00%     Markup 16.50 50.00%     Selling price 33.00 100.00%       Retailer Cost 33.00 25.00%     Markup 99.00 75.00%     Selling price 132.00 100.00%       Minimum retail selling price: 132.00                   Exercise 7 Richard Miller was preparing a new product analysis for Brand A. Based on his market research, his decision was to sell at $10 retail. Retailers customarily expected a 40% margin and wholesalers a 20% margin (both expressed as a percentage of their selling price). Brand A’s variable costs were $2 per unit and estimated total fixed costs were $28,000. At an anticipated sales volume of 9,000 units, would Richard’s Brand A make a profit?             Manufacturer Cost 2.00 41.67%   Markup 2.80 58.33%   Selling price 4.80 100.00%     Wholesaler Cost 4.80 80.00%   Markup 1.20 20.00%   Selling price 6.00 100.00%     Retailer Cost 6.00 60.00%   Markup 4.00 40.00%   Selling price 10.00 100.00%         CVP analysis for Brand A       Sales @ 9000 units 43,200.00   Less: Variable costs @ 2/unit 18,000.00   Contribution margin 25,200.00   Less: Fixed costs 28,000.00   Net loss -2,800.00       The decision would incur a net loss for Richard Miller.               Exercise 11 Jane Murray was wondering whether to increase her advertising expenditures or hire more salespeople. Her overall sales last quarter were $750,000 and her cost of goods sold was $500,000. She currently has five salespeople who cost her $250,000 in compensation and expenses per year. Her advertising budget was $240,000 on an annual basis. Her other fixed costs she calculated to be approximately $500,000 annually. Jane had recently been experimenting with increased expenditures in sales effort and advertising. A three-month test using a temporary additional salesperson at regular rates had resulted in additional sales revenues of $75,000. A one-month test in one city using a 20% increase in advertising resulted in increased sales revenue of 10%. Jane knew these tests were not all that conclusive, but wondered how she might spend her $600,000 planned marketing budget next year based on them. Alternative A: Increase sales people                     per quarter % yield notes for computation:       Incremental sales 75,000.00 given   Incremental costs     COGS 50,000.00 cost of goods sold (2/3 of sales)   Compensation 12,500.00 quarterly compensation per individual   Total 62,500.00 100.00%   Incremental profit 12,500.00 20.00%       Alternative B: Increase advertising expenditure         per quarter % yield notes for computation:       Incremental sales 206,250.00 annual sales/number of quarters *110% Incremental costs     COGS 137,500.00 cost of goods sold (2/3 of sales)   Advertising 24,000.00 increase in advertising expenditure   Total 161,500.00 100.00%   Incremental profit 44,750.00 27.71%         Marginal Yield       Alternative A 20.00%   Alternative B 27.71%       decision: since this is a mutually-exclusive situation (as referred to the first sentence), choose alternative B, increase advertising with a higher yield. However, a better decision, if this is not a mutually-exclusive project, would be to find the optimal mix between the two options. In reality, the marginal yield for advertising (or any of the two) will only reach a certain point where it is optimal; beyond that, the marginal yield would start to decline which means the chosen alternative becomes less productive.                       Read More