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