QUESTION 2 Your company manufactures Leathercraft, an attractive, traditional st
ID: 358669 • Letter: Q
Question
QUESTION 2 Your company manufactures Leathercraft, an attractive, traditional style, leather chair. It currently sells for $700 wholesale. The variable cost of each chair is $375. Marketing support costs and share of sales force expense total $120,000 per annum. Your managing director's estimates of the effect of different prices are as shown No. of Retailers Stocking Leathercraft 100 120 160 Wholesale Price Total Monthly Sales $900 $800 $700 98 130 170 (All figures exclude GST and you need not consider GST in your answer.) i. First, calculate the annual profit contribution made at each price. Which price do you recommend, and why? ii. Next, to assist your company to achieve the projected sales targets for Leathercraft, discuss the following advertising and media planning strategies a. Why is it important to build and refresh memory structures? b. How can different media be used to create an effective multimedia advertising campaign in terms of building cumulative reach, touch points, repetition and a neuro-rich environment?Explanation / Answer
i. Annual profit contribution at each price
Contribution = Price - Variable cost
At price of $900, Contribution = 900 - 375 = 525. Annual contribution for 1176 units (98 x 12) is $617,400
At price of $800, Contribution = 800 - 375 = 425. Annual contribution for 1560 units (130x12) is $663,000
At price of $700, Contribution = 700 - 375 = 325. Annual contribution for 2040 units (170x12) is $663,000
Annual contribution profit = Annual contribtion - Fixed cost
Fixed cost is given as $120,000 for sharing sales persons and marketing support costs. If it is assumed that this cost will remain same irrespective of number of stores, then prices of $800 and $900 would give the highest profits. But if fixed costs depend upon number of retailers stocking the item, then fixed costs will have to be calculated as below:
Given at price $700, fixed costs = 120,000 for 160 retailers. So fixed cost per retailer is $750.
At price $900, no. of retailers = 100, so fixed cost = 750 x 100 = 75,000
At price $800, no. of retailers = 120, so fixed cost = 750 x 120 = 90,000
Annual contribution profit = Annual contribution - fixed cost
At price $900, annual profit = 617,400 - 75,000 = $542,400
At price $800, annual profit = 663,000 - 90,000 = $573,000
At price $700, annual profit = 663,000 - 120,000 = 543,000
The recommended price will by $800 since it returns the highest profit amongst the given choices.
ii. Advertising and media strategies
a. Build and refresh memory structures: It is important for advertisers to build and refresh memory structures since audience recall of brand and ads is limited. With passage of time, audience memory of the campaign diminishes. Competitive ads and too much of clutter may reduce the attention span of the audience. Similar type of messaging may make the audience uninterested and indifferent to the brands. To keep the audience engaged with the brand and grow their loyalties toward the brand, it is necessary to constantly update the advertising content, change the formats and differentiate from competing brands.
b. Multimedia advertising: Audience engagement can be ensured by using multiple platforms to advertise a brand. Since the target audience is using different media on any given day, Advertisers create a strong recall value by having presence in multiple media platforms. Brand messaging, visuals and content can be customised to suit TV, print, outdoor, online and social media platforms to make sure that the target audience cannot miss the ad. The content must be designed to seamlessly integrate the ads across the different media platforms to create a strong visual engagement with the audience.