1

Fin MKTG 5150 1-9

a. $6.40Contribution per unit

b. $738,292.79 and 82,033 CD units

 2

1. a. Contribution per CD unit

Amount ($)
Selling Price 9.00
Less: Variable Cost
CD Package and Disk 1.25
c. $5,875,000 profit
(Direct Labor and
Material)
Songwriters Royalties 0.35
Recording Artist 1.00
Royalties

Contribution Per CD $6.40

Unit

b. Break-even volume of CD units and d. 113,284 CD units

dollars

Step 1: Computation of total fixed cost

Total fixed cost = Advertising and

promotion cost + Studio overhead

Total fixed cost = $275,000 + $250,000 =

$525,000

Step 2: Computation of contribution margin

2. a. $7 unit contribution and 35%
Contribution margin = contribution per contribution margin
unit/sales per unit*100

Contribution margin = $6.40/$9.00*100=

71.11%

Step 3: Computation of Break even volume

in dollars

Break-even volume = total fixed

cost/contribution margin
 3

Break-even volume = $525,000/71.11% =

$738,292.79

Break-even volume in units = Break-even

volume in dollars/selling price per unit

Break-even volume in units =

738,292.79/9.00= 82,033 units

c. Net profit if 1 million CDs are sold

Amount ($) b. 25,000 units and $500,000

Total 1,000,000 6,400,000
Contribution *6.4
Less: Fixed From part 525,000
Cost b
Total Profit if 1 $5,875,000
Million CDs
sold

d. Necessary CD unit volume to achieve a

$200,000 profit

CD volume required = [(total fixed costs +

profit)/contribution margin]/sale price per
c. 29,286 units or 29.29% market share
unit

= [($525,000+$200,000)/.7111]/9.00 =
113,284 units

2. a. VCIs unit contribution and

contribution margin

Unit contribution = price per unit - variable

cost per unit

Variable cost = Units* (cost of reproduction

per 1,000 units + manufacture of packaging
and labels per 1,000 units + royalties per
1,000 units) + 40% margin of revenue from
units sold

=100,000 units*(4+.5+.5) + .
4*(100,000*20) = $1,300,000
 4

Per unit Variable cost = VC/total output 3. a. Rash: 250,000 units and $500,000 in
sales
= $1,300,000/100,000 units = $13 each unit Red: 200,000 units and $200,000 in sales
Unit contribution = sales price-variable cost

=$20-$13 = $7

Contribution margin= Contribution margin

per unit / retail price per unit = 7 / 20 = 35%

b. Break-even point in dollars and units

Break-even point = fixed costs/unit

contribution

Fixed costs = cost of distribution + label

design + package design + advertising

= ($125,000+$5,000+$10,000+$35,000)/7=
25,000 units

Break-even point in dollars = breakeven

point in units * retail price per unit = 25,000
* $20 = $500,000

c. Market share needed to achieve 20% on

VCIs investment

Target profit = investment * 20% = b. Rash: $3.33 increase in sales

$150,000 * .2 = $30,000
Red: $1.33 increase in sales
Expected sales to earn target profit = (total
fixed cost + target profit) / contribution
margin per unit

= ($175,000 + $30,000) / $7 = 29,286 units

Market share = expected sales/total market

*100

=$29,285.71/100,000*100 = 29.29%
 5

3. a. Calculation for: c. Rash: Sales should be increased by

Rash increase in sales
Investment in advertising = unit contribution
* increase in unit sales(R)
1,500,000 units or $2,700,000
Red: Sales should be increased by 1,730,769
units or $1,557,692

$150,000 = .60*R

R=150,000/.6 = 250,000 units

Increase in sales=R*2

Increase in sales=250,000*2=$500,000

Red increase in sales

Investment in advertising = unit contribution

* increase in unit sales(r)

$150,000 = .75*r

R=150,000/.75 = 200,000 units

Increase in sales=r*2

Increase in sales=200,000*1=$200,000

b. Calculation for:

Rash additional sales needed to cover

advertising

Increase in sales = Total increase in

sales/increase in advertising 4. a. $0.36

=$500,000/150,000=$3.33 increase in sales

Red additional sales needed to cover

advertising

Increase in sales = Total increase in

sales/increase in advertising

=$200,000/150,000=$1.33 increase in sales

 6

c. Calculation for: Wholesale cost= retail price 20 % retailer

discount-10% wholesalers discount off of
Rash increase in sales to cover 10% price retailers cost
reduction
=$.50-.10 (20%*.5)-.04(10%*(.50-
Current sale price = $2, if reduced 10% = 20%*.50))= $.36
2*.9= $1.80

Current contribution = $1,000,000 * .60

b. $.08 contribution margin per unit
=$600,000

New contribution margin = 600,000/.40

(1.80-1.40)=1,500,000 units

Sales in dollars = $1.80*1,500,000=

$2,700,000
c. 4,250,000 units to break-even
Rash increase in sales to cover 10% price
reduction

Current sale price = $1, if reduced 10% =

1*.9= $.90 d.31.11% market share
Current contribution = $1,500,000 * .75
Table 1: LX1 LX2 LX3 Total
=$1,125,000 Model
New Demand/Year 2000 1000 500
contribution in units
DVD Selling $175.00 $250.00 $300.00
margin =
Price per unit
1,125,000
Variable Cost $100.00 $125.00 $140.00 5. The
/.65 (.90-.25)= per unit
1,730,769 units a. $75.00 $125.00 $160.00
Contribution
Sales in dollars = per unit
$.90*1,730,769= b. Total $150,000 $125,00 $80,000 $355,000
$1,557,692 Contribution 0
a. Contribution per unit = Selling price per unit-Variable cost per unit
4. a. Price at b. Total contribution =Unit demand*
contribution per unit in dollars
which DCI will
introduction of Model LX4 lowers
sell to wholesalers
profitability by $380. The company should
not introduce Model LX4.
 7

b. Contribution per unit

Wholesale cost-Variable material cost-

variable labor cost-(first can discount/per 5
cans sold) =contribution per unit

$.36-$.18-$.06-$.20/5=$.08

c. Break-even unit volume for the first year

=fixed overhead/contribution margin

=$340,000/$.08= 4,250,000 units

d. First year break-even share of the market

=Break-even unit volume/(total canned

market*percent of breakfast drink volume)

=4,250,000 units/(21,000,000 units*65% )=

31.11%

5. Existing conditions (Table 1)

 8

LX3: 60% reduction of 60% of unit sales

from 300 estimated demand = .
Table 2: LX1 LX2 LX3 LX4 Total
Model
a. 1982 946 392 300
Demand/Year
in units
DVD Selling $175 $250 $300 $375
Price per unit
Variable Cost $100 $125 $140 $225
per unit
b. Contribution $75 $125 $160 $150
per unit
c. Total $148,650 $118, 250 $62, 720 $45,000 $374,620
Contribution
Less: $20,000
Fixed
Costs
Net $354,620
Profit
d. Change in Contribution = $374,620-$355,000=$19,620
Change in contribution after addition fixed costs from new model=
$19,620-$20,000 = ($380)
a. Initial demand minus reduction of demand from addition of Model LX4
b. Contribution per unit = Selling price per unit-Variable cost per unit
c. Total contribution =Unit demand*
contribution per unit in dollars
d. Change in Contribution= Total contribution from Table 2 - total contribution from Table
1

Reduction in demand (60% of unit sales 6*.6*300=108 units

from new model, LX4 will come from
New proposal (Table 2):
existing model sales)

LX1: 10% reduction of 60% of unit sales

from 300 estimated demand= .1*.6*300= 18
units

LX2: 30% reduction of 60% of unit sales

from 300 estimated demand =.3*.6*300=54
units
 9

6. Max Leonard should add the new
Model X line because profit would
increase by $363,000,000 from the
existing Omega and Alpha product
lines.
6. Analysis of adding DC6900-X model to
existing line
Scenario A: Contribution with existing line
models DC6900-Omega and DC6900-Alpha
with reduction amount from potential
addition of new model (Omega = 30%
reduction from 500,000 units and Alpha=
20% reduction from 500,000 units)

Table 1: DC6900-X Table 2:DC6900-

DC6900- DC6900- DC6900-
Model OmegaModel Alpha Omega Alpha
Sales price 3,900 5,900 a. Units2,500 150,000 100,000
per unit ($) sold
Less: Unit 1,800 2,200 b. Total1,200 555,000,00 130,000,00
variable cost contributio 0 0
($) n
a. Units sold=500,000 units (from potential volume of
Unit 2,100 3,700 new model 1,300
X *.70(100%-% reduction)
Contribution b. Total contribution = units sold*unit contribution
($) (table 1)
Scenario
B: Contribution and profit after addition of
new model X with sales volume of 500,000
units for the new model, and existing models
with % reductions
 10

Model DC6900-X DC6900- DC6900- c. Profit from

Omega Alpha Model X
only:
a. Units sold 500,000 150,000 100,000
b. Total 1,050,000,00 555,000,000 130,000,00
Contributio 0 0
n 7. a.
Less: Fixed 2,000,000 0 0
Costs
Profit: 1,048,000,00 555,000,000 130,000,00 $363,000,000
0 0
a. Units sold=500,000 units (from potential volume of new model X *.70(100%-% reduction)
b. Total contribution = units sold*unit contribution (table 1)
c. Profit from Model X-Profit from Omega-Profit from Alpha
7. a. Net Analysis if company should proceed with
present value is negative so the product development if discount rate is 20%
company should not develop product.

Net present value was ($579,100.00)

from the analysis.

b. Net
Year Cash Flow a. Discount b. Discounted
present value
Factor Cash Flow
is positive so
0 ($17,500,000) =[1/(1+.20)^0] ($17,500,000)
the
= 1.00
1 $ 6,100,000 =[1/(1+.20)^1] $5,081,300 company
=.833 should
2 $ 7,400,000 =[1/(1+.20)^2] $ 5,135,600 develop
=.694 product.
3 $7,000,000 =[1/(1+.20)^3] $4,053,000
=.579
4 $ 5,500,000 =[1/(1+.20)^4] $2,651,000
=.482
c. Net ($579,100)
Present
Value

a. Discount factor= 1/(1+discount rate)^year being determined from 0-4

b. Discounted Cash Flow = Cash flow*discount factor
c. Net present value = sum of all discounted cash flows form year 0-4
 11

Net present value was $1,153,400.00 b. Analysis of product development at 15%

discount rate
from the analysis.

Year Cash Flow a. Discount b. Discouted

Factor Cash Flow
0 ($17,500,000) =[1/ ($17,500,000)
(1+.15)^0] =
1.00
1 $ 6,100,000 =[1/ $5,307,000
8. a.
(1+.15)^1]
Customer
=.870
lifetime
2 $ 7,400,000 =[1/ $5,594,400
value (CLV)
(1+.15)^2]
calculation
=.756
3 $7,000,000 =[1/ $4,606,000 Customer
(1+.15)^3] lifetime
=.658 value is the
4 $ 5,500,000 =[1/ $3,146,000
present
(1+.15)^4]
value of the
=.572
cash inflows
c. Net $1,153,400.00
received
Present
from the
Value
customer

8. a. The a. Discount factor= 1/(1+discount rate)^year being determined from 0-4 CLV=cash
b. Discounted Cash Flow = Cash flow*discount factor
customer margin per
c. Net present value = sum of all discounted cash flows form year 0-4
lifetime value
customer*[1/ (1+interest rate-retention rate)]
is
Cash margin per customer = Monthly fee-
$85.36 a month
variable cost-loyalty fee

b. Customer retention would need to be

increased to 79.02% in order to avoid

impacting the customer lifetime value.

 12

$85.36=($19.95-$.50-$.50-$.20(additional
loyalty per month per customer))*[1/(1+.01-
r)]

4.55=1/(1+.01-r)

4.55=1/1.01-r

1/4.55 = 1.01-r

r= 1.01-(1/4.55)= .7902

9. a. Pro forma income statement for Home

Office Systems with information provided

CLV=($19.95-$.50-$.50)*[1/ Table 1: Home Office Systems

(1+.01+-.788)]= $85.36
Sales
a. Less: Cost of Goods Sold
b. Gross Margin
b. If the company decided to spend $.20
Marketing Expenses:
more a month to boost retention and avoid
c. Sales Expenses $3,750,0
reducing customer lifetime value, then they
d. Advertising/Sales Promotion $1,650,0
would need to increase retention to:
 13

e. Freight Expenses
General and Admin. Expenses:
Manufacturing Overhead
Administrative Salaries b. Pro Forma income statement of Home
f. Other Administrative Office Systems with $20,000,000 annual
Expense sales
g. Net Profit before Tex
Table 2: Home
a. Cost of Goods sold= 40% of sales force expenditure*sales Office
directors Systems
budget for salaries and
fringe benefits for both corporations was $7.5 million
b. Gross margin = Sales- cost of goods sold Sales
a. Less: Cost of Goods Sold
c. =15% of sales on Home Office Systems=$25 million*.15
d. =Production and Media placement costs + productionb. Gross Margin
costs+ advertising allowance= $300,000+
$100,000+ $.05*25 million Marketing Expenses:
e. Freight expenses = 8% of sales=.08*$ 25million c. Sales Expenses $3,000,0
f. =Administrative overhead+(Sales*percent of directd.material
Advertising/Sales Promotion
and labor costs from sales)= $1,400,0
$300,000+($25,000,000*.50) e. Freight Expenses $1,600,0
General
g. Net Profit = Gross Margin-Marketing expenses-general andand Admin.
admin. Expenses:
expenses
Manufacturing Overhead $600,000
Administrative Salaries $250,000
f. Other Administrative $10,300,
Overhead
g. Net Profit before Tex
a. Cost of Goods sold= 40% of sales force expenditure*sale
fringe benefits for both corporations was $7.5 million
b. Gross margin = Sales- cost of goods sold
c. =15% of sales on Home Office Systems=$20 million*.15
d. =Production and Media placement costs + production co
$100,000+ $.05*20 million
e. Freight expenses = 8% of sales=.08*$ 20million
f. =Administrative overhead+(Sales*percent of direct mate
$300,000+($20,000,000*.50)
g. Net Profit = Gross Margin-Marketing expenses-general a
 14

9. c. Home Office Sales would need to 9. c. Dollar sales required for Home Office
Systems to break-even:
reach $20,681,818.18in sales to

break even.
Table 3: Fixed Total
Costs
Sales Force $3,000,000
Allocation
Manufacturing $600,000
Overhead
Administrativ $300,000
e Overhead
Production
and Media
Costs:
Trade and $300,000
Promotion
Advertising $100,000
Administrativ $250,000
e Salaries
Total $4,550,000
 15

Contribution margin= 1- (sales-fixed Break-even dollars required= Fixed

costs)/sales= 1- ($20,000,000-$4,550,000)/ costs/contribution margin=$4,550,000/.22=
$20,000,000=22% $20,681,818.18