Chapter Two ProblemsAnalyses in Marketing Decision-Making

Question #1

1a. Calculate the Contribution Per CD

Contribution=Selling Price – Variable Costs

Selling Price to CD Distributor $9.00

Variable Costs $2.60

CD Package and Disk $1.25

Songwriter Royalties $0.35

Recording Artist Royalties $1.00

Contribution Per CD $6.40

1b. Calculate the Break-Even Volume in Units

Unit Break-Even = Total Fixed Costs/Contribution Per Unit

Fixed Costs $525,000

Advertising and Promotion $275,000

Studio Overhead 250,000

Contribution Per Unit $6.40

Unit Breakeven 82031.25

1b. Calculate the Break-Even Volume in Dollars

Contribution Margin=Contribution Per Unit/Selling Price

Selling Price $9.00

Contribution Per Unit $6.40

Contribution Margin 71.10%

Dollar Break-Even = Total Fixed Costs/Contribution Margin

Total Fixed Costs $525,000

Contribution Margin 71.10%

Dollar Break-Even $738,397

1c.Calculate the Net Profit if 1 Million CDs are Sold

Total Sales ($9 x 1,000,000) $9,000,000Total Variable Cost ($2.60 x 1mm) $2,600000Total Fixed Cost $525,000

Net Profit $5,875,000

1d. Calculate the Necessary CD Unit Volume to Achieve a $200,000 Profit

Unit Objective = (Fixed Cost + Profit Objective) /Contribution Per Unit

Fixed Cost $525,000Profit Objective $200,000

Contribution Per Unit $6.40

Unit Objective 113,282

Question #2

2a. What is VCI’s Unit Contribution and Contribution Margin?

Reference Price = Suggested Retail Price – Retailer Margin

Suggested Retail Price $20.00

40% Retailer Margin $8.00

Reference Price $12.00

Unit Contribution=Reference Price – Unit Variable Costs

Contribution Margin = Unit Contribution/Reference Price

Reference Price $12.00

Unit Variable Cost $5.00Copy Reproduction $4.00Label and Package .50Royalties .50

Unit Contribution $7.00Contribution Margin 58.3%

2b. What is VCI’s Unit Break-Even and Dollar Breakeven?

Unit Break-Even = Total Fixed Costs/Contribution Per Unit Dollar Break-Even = Total Fixed Costs/Contribution Margin

Fixed Costs $175000Distribution Rights $125000Label Design $5,000Advertising $35,000Package Design $10,000

Unit Contribution $7.00Contribution Margin 58.3%

Unit Break-Even 25,000

Dollar Break-Even $300,1722c.What Share of the Market Would the Film Have to Achieve to Earn a 20%

Return on Investment?

Unit Sales Objective = (Total Fixed Costs+ 20% ROI)/Contribution Per Unit

Unit Market Share = Unit Sales Objective/Market Size

Fixed Costs $175000

20% ROI (150,000 x .20) $30,000

Contribution Per Unit $7.00

Market Size 100,000

Unit Sales Objective 29,286Unit Marketshare 29.3%

Question #3

3a.What Absolute Increase in Unit Sales and Dollar Sales Is Necessary to Recoup $150,000 in Advertising Expense?

Unit Sales Objective = Cost to Cover/Contribution Per UnitDollar Sales Objective = Cost to Cover/Contribution Margin

RASH-AWAY RED-AWAYA. Cost to Cover $150,000 $150,000

B. Unit Price $2.00 $1.00 C. Unit Variable Costs $1.40 $.25D. Contribution Per Unit $0.60 $0.75 E. Contribution Margin 30% 75%

Unit Sales Objective A/C 250,000 200,000Dollar Sales Objective A/E $500,000 $200,000

3b. How Many Additional Dollars in Sales Must be Produced to Cover Each Dollar of Advertising?

Extra Sales Dollars = $1/Contribution Margin

RASH-AWAY RED-AWAYContribution Margin 30% 75%

Extra Sales Dollars $3.33 $1.33

3c. What Increases in Unit and Dollar Sales Will be Required to Maintain the Current Total Contribution Dollars After a 10% Price Cut?

Required Unit Sales=Current Contribution Dollars/Contribution Per UnitRequired Dollar Sales=Current Contribution Dollars/Contribution Margin

RASH-AWAY RED-AWAYCurrent Price $2.00 $1.00Current Unit Sales 1,000,000 1,500,000

Current Contribution $.60 $.75Current Contribution Margin 30% 75%A. Current Contribution Dollars $600,000 $1,125,000

New Price $1.80 $.90B. New Contribution Per Unit After Price Cut $.40 $.65C. New Contribution Margin After Price Cut 22.2% 72.2%

Required Unit Sales A/B 1,500,000 1,730,769Current Unit Sales 1,000,000 1,500,000Increase in Unit Sales 500,000 230,769

Required Dollar Sales A/C $2,700,000 $1,557,692Current Dollar Sales $2,000,000 $1,500,000Increase in Dollar Sales $700,000 $57,692

Question #4

4a. At what price will Diversified Citrus Industries be selling their products to wholesalers?

4b. What is the contribution per unit for ZAP?

Unit Selling Price $.36

Variable Cost Per Unit $.28

Material $.18

Labor $.06

Coupon (1/5 x $.20 = $.04) $.04

Contribution Per Unit $.08

$.50

$.40

$.36

Retail Price to Consumer

Price to Retailers

Price to Wholesalers

-20% Margin ($.10)

-10% Margin ($.04)

4b. What is the break-even unit volume in the first year?

Break-Even Units = Fixed Costs / Contribution Per Unit

Fixed Costs $340,000

Advertising $250,000

Overhead $90,000

Contribution Per Unit $.08

Break-Even Units (cans) 4,250,000

4c. What is the first year break-even share-of-market?

Break-Even Share of Market = B.E. Volume / Served Market Size

Break-Even Units 4,250,000

U.S. Market Size 21,000,000

Served Market Size (.65 x 21m) 13,650,000

Break-Even Share of Market 31.1%