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REVISED DECEMBER 15, 2014

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JULIE HENNESSY AND EVAN MEAGHER KEL682

Hohner Musikinstrumente GmbH & Co. KG:

Break-Even Analysis

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Helmut Schmidt recently had been promoted to product manager for Hohner
Musikinstrumente GmbH & Co. KG, the worlds foremost manufacturer of harmonicas,
accordions, melodicas, and ukuleles. He was sitting at his desk in Trossingen, Germany,
reviewing his first assignment, which had just come from the companys senior executive team.
Schmidt, a marketing major who had barely survived Finance I, had just two days to calculate the
break-even point for the companys flagship product, the Marine Band harmonica.
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A Brief History of the Harmonica
Most historians track the harmonicas roots to ancient China, where either Empress Nyu-kwa
or Emperor Huang Tridepending on the sourceinvented the sheng in about 3000 B.C. This
predecessor to the harmonica used a similar free-reed design, in which reeds were affixed to
one end of a small, handheld base (the wind chamber); by blowing into the mouthpiece, the
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player produced a tone when the reeds vibrated. Over the next few thousand years, such free-reed
instruments became popular throughout Asia, ultimately making their way to Europe, where
organ makers such as John Buschmann and his son Christian Friedrich Buschmann began
producing smaller and smaller versions in the early nineteenth century.

In the 1850s, Joseph Richter, an American immigrant from the Czechoslovakian region of
Bohemia, invented the modern diatonic harmonica by adding a second set of reeds on the other
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side of a cedar comb, which were activated by breathing in rather than by blowing out (see
Exhibit 1). Today, this so-called Richter tuning remains the most common tuning for harmonicas
all over the world. The design for the Richter-tuned harmonica, which combines layers of reeds, a
comb, and top and bottom cover plates, prompted harmonica players to nickname it the tin
sandwich.

The Richter tuning originally was designed to play Eastern European folk music, but the
diatonic harmonica changed forever when its popularity grew among American country
musicians in the 1920s and 30s. Harmonica players such as Jaybird Coleman pioneered the
technique of playing the harmonica in a key a musical fifth above the key the instrument was
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intended to be playedfor example, playing in the key of G on a harmonica tuned to the key of

2012 by the Kellogg School of Management at Northwestern University. This case was developed with support from the December
2009 graduates of the Executive MBA Program (EMP-76). This case was prepared by Evan Meagher 09 under the supervision of
Professor Julie Hennessy. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as
endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission
to reproduce materials, call 800-545-7685 (or 617-783-7600 outside the United States or Canada) or email
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 HOHNER MUSIKINSTRUMENTE GMBH & CO. KG KEL682

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C. This intentional corruption of the Richter tuning allowed players to produce a variety of

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expressive bent notes now known as the blues scale.

The instruments low price made it extremely popular, especially among African American
players, who called it the Mississippi Saxophone. As they migrated in large numbers from the
American South to northern urban areas such as Chicago in the 1940s and 50s, the harmonica
found its way into blues and jazz music. This new style of playing combined with the cheap

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tweed amplifiers and crystal element microphones popular at the time led to the now-familiar
compressed, squawking tone associated with blues harmonica, or blues harp.

Hohner Musikinstrumente GmbH & Co. KG

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In 1857 the 24-year-old son of a German family of weavers purchased one of the early
handcrafted harmonicas and decided to go into business manufacturing his own brand. During his
first year of business, Matthias Hohner, his wife, and one employee manufactured 650
harmonicas in their kitchen. Demand spiked after Hohner sent some to cousins who had
emigrated to the United States, and soon after, Hohner Musikinstrumente GmbH & Co. KG built
the largest harmonica fabrication facility in the world. The Hohner Marine Band harmonica,
named after the band led by John Philip Sousa, was introduced in 1896 and went on to become
the most popular harmonica in the world.
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After he died in 1893, Matthias Hohners sons began expanding the product line to include
accordions, later adding recorders and melodicas (essentially, recorder-type woodwind
instruments with a keyboard layout like a piano just below the mouthpiece). In the 1980s, Hohner
expanded further, offering a line of guitars and partnering to distribute Sabian cymbals and Sonor
drums.
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This product-line expansion was matched by a steady global expansion, with subsidiaries in
the United States, United Kingdom, China, Japan, and Brazil. Hohner began to struggle, however,
after the rise of rock music in the 1960s depressed global harmonica demand just as Asian
competitors started offering lower-cost harmonicas. The company implemented drastic layoffs in
1986 amidst two decades of losses that forced the Hohner family to sell a controlling interest to
Kunz-Holding GmbH & Co., a wood-products manufacturer, while retaining just 8% ownership.
Kunz later sold Hohner to a Virgin Islandsbased subsidiary of K.H.S. Musical Instrument Co.
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Ltd. of Taiwan. New management from K.H.S. helped the company enact an aggressive
restructuring and turnaround plan at the turn of the twenty-first century, resulting in Hohners
first profitable year in more than two decades.

The Harmonica Market

Since 2000, Hohners share of the global harmonica market had been fairly steady at
approximately 75%, despite the growth of upstart competitors such as Lee Oskar, the brand
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launched by the harmonica player for the band War, which had about 10% market share. Other
competitors tended to focus on specific regions, such as Suzuki in Asia or Hering in Brazil.
Hohner did not sell directly to end users or even to retailers but instead sold exclusively through
distributors, which then supplied both online and brick-and-mortar musical instrument retailers.

2 KELLOGG SCHOOL OF MANAGEMENT

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 KEL682 HOHNER MUSIKINSTRUMENTE GMBH & CO. KG

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While we do not sell directly to retailers, we have started to think about what we can do to

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increase their sales. Weve recently started partnerships with large retailers like Guitar Center,
said one Hohner representative. Typically, the way you would buy a harmonica was to ask for it
[at a store] because it was either in a drawer behind the desk or in a case under glass. What weve
foundwhat the research suggestsis that you can drive sales by having the harmonicas out in a
case with blister cards explaining what kind of harmonica it is, why its better or worse than the
other ones, and so on. Thats the silent salesman.

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Hohner had identified two basic buyer profiles, which were distinguished by the players
seriousness about the instrument. The vast majority (about 95%) of buyers were casual players
who made an impulse purchase of a less expensive harmonica (under 10). Such players typically
owned only one harmonica.

On the other hand, more serious players tended to buy more expensive (at least 20)

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harmonicas in higher volumes. Many serious players owned as many as forty or fifty harmonicas
in different keys, with alternate tunings and by different brands. Such customers also tended to
perform their own instrument repairs and retuning, which extended the lifetime of the harmonica.
Though they represented a small minority of the customer base, one Hohner representative
suggested these buyers accounted for as much as 30% of harmonica sales in Germany.

Hohners biggest challenge had always been converting the first type of buyer to the second
type. Theres a low barrier to entry on the first harmonica; you can play it if you can breathe,
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and its not very expensive, observed a Hohner representative. The hard part is getting
[customers] to buy a second one, [which wont happen unless] they realize they need different
keys to play along with Bob Dylan songs on the radio, or because they realize they need a better
one if they want to bend notes and play blues.

The representative continued, Popular music definitely helps; there was a slight increase in
sales every time Bob Dylan started playing harmonica, or [in] the blues revival of the early 1980s
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with the Fabulous Thunderbirds and George Thorogood. . . . My dream right now is that Taylor
Swift comes out with a song playing harmonica. Or if I can get Nick Jonas to play harmonica on
just one hit song, you can imagine that it would be very good for us.

Costs and Demand

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The Hohner Marine Band harmonica retailed for 30 in Germany (see Exhibit 2). German
retailers generally insisted on a 33% margin, and distributors took a 12% margin, based on the
selling price of each. Hohner and its direct competitors sold a total of 800,000 units annually,
with Hohners share at 75%.

Hohner faced variable manufacturing costs of 2.70 per Marine Band, with fixed
manufacturing costs of 900,000 and an annual advertising budget of 500,000. The Marine Band
managers salary and expenses totaled 35,000. Marine Band salespeople working for Hohner
were paid solely by a 10% commission on Hohners sales. Shipping costs, breakage, and
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insurance were 0.60 per unit.

KELLOGG SCHOOL OF MANAGEMENT 3

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 HOHNER MUSIKINSTRUMENTE GMBH & CO. KG KEL682

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Assignment

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Assume you are the manufacturer and answer the following questions using the information
in the case. Calculate answers to at least three decimal places except for unit calculations, which
should be rounded up to the next full unit.

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1. What is the unit contribution for Hohner?

2. What is Hohners break-even point?

3. What market share does Hohner need to break even?

4. What is Hohners profit?

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5. Industry demand is expected to increase to 900,000 units next year. Schmidt is considering
raising his advertising budget to 1 million.

a. If the advertising budget is raised, how many units must Hohner sell to break even?

b. How many units must Hohner sell to achieve the same profit (in terms of dollar amount)
next year as it earned this year?
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c. What must Hohners market share be next year for its profit (in terms of dollar amount)
to be the same as this year?

6. After some reflection, Schmidt decided not to increase Hohners advertising budget. With
industry demand expected to increase to 900,000 units next year, Schmidt thought he would
give retailers an incentive to promote the Marine Band by raising their margins from 33% to
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40%. The margin increase would be accomplished by lowering the manufacturers price of
the product to retailers. Distributor margins would remain at 12%.

a. If retailer margins are raised to 40% next year, how many Marine Bands must Hohner
sell to break even?

b. How many units must Hohner sell to achieve the same profit (in terms of dollar amount)
next year as it earned this year?
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c. What must Hohners market share be for its profit (in terms of dollar amount) to remain
at this years level?
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4 KELLOGG SCHOOL OF MANAGEMENT

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Permissions@hbsp.harvard.edu or 617.783.7860
 KEL682 HOHNER MUSIKINSTRUMENTE GMBH & CO. KG

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Exhibit 1: Schematic of the Diatonic Harmonica

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Source: KJ Music, Genuine Hohner Harmonica Replacement Parts, http://www.kurtjacob.com.au/HarmParts.html (accessed August 16,
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2012).

Exhibit 2: The Hohner Marine Band

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Source: Hohner Inc., Marine Band Brand, http://www.hohnerusa.com/index.php?5 (accessed August 16, 2012).

KELLOGG SCHOOL OF MANAGEMENT 5

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Permissions@hbsp.harvard.edu or 617.783.7860