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Situation: You are a brand manager for a manufacturer of electric razors. You us

ID: 3195644 • Letter: S

Question

Situation: You are a brand manager for a manufacturer of electric razors. You use a traditional channel of distribution. You sell to wholesalers who in turn sell to retailers, who sell to consumers. You have gathered the following information:

Current retail selling price is $120 per razor.

Retailers margin is 40%

Wholesalers margin is 30%

Direct labor is $6 per unit

Raw materials are $8 per unit

Manufacturer’s salespersons commissions are $12 per unit

Factory and administrative overhead is $3,000,000.

Sales force travel costs are $200,000

Advertising is $500,000.

Current sales are 500,000 units

Overall size of annual market for electric razors is 5,000,000.

Questions:

What is the cost per unit for the retailer?

What is the cost per unit for the wholesaler?

What is the manufacturer’s CPU?

What is the break-even volume for the manufacturer?

What is the dollar break-even volume for the manufacturer?

What unit volume does the manufacturer need to generate $2,000,000 in total contribution?

What is the current total contribution for the manufacturer?

Suppose the manufacturer decided to reduce the selling price to the wholesaler by $4, what percentage increase in unit volume would be needed to maintain the current level of profitability for the manufacturer?

Suppose the retailer decided to raise their selling by $4, what is the percentage decrease in unit volume that would allow the retailers to maintain their current level of profitability?

Explanation / Answer

1. cost per unit for the retailer= 120/140*100=85.71

2.cost per unit for the wholesalers=85.71/130*100=65.93

3.cost per unit for the manufacturers= raw material + direct labour+ salespersons commission+advertising/current sales+sales force travel costs/current sales+factory &administrative overheads/directlabour+raw materials*production

=8+6+12+500000/500000+200000/500000+3000000/500000

=8+6+12+1+.4+6

=33.4

4. p/v ratio=sales-variable costs/net sales

net sales=500000*85.71=42855000

variable costs=6+8+12+1+0.4=27.4*500000=12700000

contribution=sales-variable costs=42855000-12700000=30155000

p/v ratio=70.36

.break even volume for the manufacturer=fixed costs / p/v ratio

=3000000/70.36%=4263786

5.dollar break even volume for the manufacturer=4263786

6.unit volume to generate by the manufacturer