Hank Alger has just become product manager for Brand K. Brand K is a consumer pr
ID: 2475095 • Letter: H
Question
Hank Alger has just become product manager for Brand K. Brand K is a consumer product with a retail price of $1.00. Retail margins on the product are 23%, while wholesalers have a 10% mark-up. Variable manufacturing costs for Brand K are $0.10 per unit. Fixed manufacturing costs = $700,000. The advertising budget for Brand K is $500,000. In 20x1, Brand K and its direct competitors sell a total of 20 million units annually; Brand K has 25% of this market. In 20x1, what is:
1) The unit contribution for Brand K?
2) Brand K’s break even point? (round answer to the nearest thousand) K
3) Brand K’s profit? (round answer to the nearest thousand) $ K
4) The market share Brand K needs to break even? %
In 20x2, industry demand is expected to increase to 25 million units per year. Mr. Alger is considering raising his advertising budget to $1 million. Assuming Mr. Alger’s market share increases to 30% in 20x2 if the advertising budget is raised:
5) What will be Mr. Alger’s ROI on his investment? %
Upon reflection, Mr. Alger decides not to increase Brand K’s advertising budget. Instead, he thinks he might hire 2 additional sales reps (combined salary: $200,000). Assuming his market share in 20x2 increases to 28%:
6) What will be Mr. Alger’s ROI on his investment?
Explanation / Answer
Answer:1) Unit Contribution = Price (the price manufacturer to wholesaler) – Variable cost
=0.693-0.10=$0.593 per unit
Wholesaler price to retailer = Retail Price * (1- Retail Margin)
=$1(1-0.23)=$0.77
Manufacturer price to wholesaler = Wholesaler to Retailer price * (1-Wholeseller margin)
=$0.77(1-0.10)=0.693
Answer:2 Break-even volume = Fixed Cost / UC
=($700000 fixed manufacturing cost+$500000 advertising cost)/0.593=2023608.77
Answer:3 Profit impact = UC x Units Sold – FC
=20,000,000*0.25*0.593-1200000=1765000
Answer:4 Break-even market share = 2023608.77/20000000 = 10.12%
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