The group product manager for ointments at a corporation was reviewing price and
ID: 446650 • Letter: T
Question
The group product manager for ointments at a corporation was reviewing price and promotion alternatives for two products Rash-Away and Red-Away. Both products were designed to reduce skin irritation, but Red-Away was primarily a cosmetic treatment whereas Rash-Away also included a compound that eliminated to rash. The price and promotion alternatives recommended for the two products by their respective brand managers included the possibility of using additional promotion or a price reduction to stimulate sales volume. A volume, price and cost summary for the two products follows:
Rash-Away:
Unit Price $2.00
Unit Variable costs $1.40
Unit contribution $0.60
Unit volume 1,000,000 units
Red-Away:
Unit Price $1.00
Unit Variable costs $0.25
Unit contribution $0.75
Unit volume 1,500,000 units
Both brand managers included a recommendation to either reduce price by 10% or invest an incremental $150,000 in advertising.
1- What absolute increase in the unit sales and dollar sales will be necessary to recoup the incremental increase in advertising expenditures for Rash-Away? For Red-Away? -- Show Calculations:
Explanation / Answer
Given:
Rash-Away:
Unit Price $2.00
Unit Variable costs $1.40
Unit contribution $0.60
Unit volume 1,000,000 units
Red-Away:
Unit Price $1.00
Unit Variable costs $0.25
Unit contribution $0.75
Unit volume 1,500,000 units
To Find:
What absolute increase in the unit sales and dollar sales will be necessary to recoup the incremental increase in advertising expenditures for Rash-Away? For Red-Away?
Solution:
Variable price is $1.40 and contribution is $0.60 thus selling price of rash away is $2.00(variable cost + contribution).
Contribution margin for rash away is ($2.00 - $1.40)/$2.00
= $0.3
Total fixed cost = unit price*unit volume
= $2.00*1000000
= $2000000
Break even volumes in units = total fixed cost/contribution
= $2000000/ $0.60
= $3333333.34
Break even volumes in dollars = total fixed cost/contribution margin
= $2000000/0.3
= $ 6666666.67
Thus total sales is($1000000* $ $2.00) = 2000000
Less: total variable cost ($1000000 * $1.40) = 1400000
Less: total fixed cost () = $150000
Net profit = $450000
Variable price is $0.25 and contribution is $0.75 thus selling price of rash away is $1.00(variable cost + contribution).
Contribution margin for rash away is ($1.00 - $0.25)/$1.00
= $0.75
Total fixed cost = unit price*unit volume
= $1.00*1500000
= $1500000
Break even volumes in units = total fixed cost/contribution
= $1500000/ $0.75
= $2000000
Break even volumes in dollars = total fixed cost/contribution margin
= $1500000/0.75
= $ 2000000
Thus total sales is($1500000* $ $1.00) = 1500000
Less: total variable cost ($1500000 * $0.25) = 375000
Less: total fixed cost () = $150000
Net profit = $975000
Absolute increase in unit sales for Rash-Away = Break even volumes in units – Net profit
= $3333333.34 - $450000
= $2883333.34
Absolute increase in dollar sales for Rash-Away = Break even volumes in dollars – Net profit
= $6666666.67- $450000
= $6216666.67
Absolute increase in unit sales for Red-Away = Break even volumes in units – Net profit
= $2000000 - $975000
= $1025000
Absolute increase in dollar sales for Red-Away = Break even volumes in dollars – Net profit
= $2000000 - $975000
= $1025000
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