ST. JOHN’S UNIVERSITY
NEW YORK
College of Business Administration
MKT200
Dr. Doherty
FINANCIAL PROBLEMS
1.
The following information pertains to a new product:
Direct Material and Labor
Transportation Cost
Packaging
Advertising and Promotion
Overhead
Selling Price to Distributor
$1.25 per unit
$0.35 per unit
$1.00 per unit
$275,000
$250,000
$9.00
Calculate
a.
b.
c.
d.
Contribution per unit
Break Even Volume and Sales
Net Profit if one million units are sold
Necessary volume to achieve a $200,000 profit. What
assumption is needed to perform this calculation?
A company offers two versions of a product – Standard and
Deluxe – under two different product managers. Relevant data
appears below.
Standard
Deluxe
Unit Price
$1.00
$2.00
Unit Variable Cost
$0.25
$1.40
Unit Contribution
$0.75
$0.60
Unit Volume
$1,500,000
$1,000,000
2.
Both product managers want to either reduce price by 10% or invest an
incremental $150,000 in advertising. Assume that the products are not
cross elastic.
a. What incremental increase in units sold and dollar sales would be
necessary to justify the additional advertising for Standard?
For Deluxe?
b. How many additional sales dollars must be produced to cover each
$1.00 of incremental advertising for Standard? For Deluxe?
c. What absolute increase in unit sales and dollar sales will be necessary
to maintain the level of total contribution dollars if the price of each
product is reduced by 10 percent?
d. What general principles are illustrated in this problem based on the
calculations you performed?
3.
Super Cola has spent $300,000 on R&D to develop a carbonated
beverage that contains the necessary daily requirements for Vitamins C
and E. The new cola will be called Total and will be introduced in 12 ounce
cans. The national market demand for 12 ounce colas is 21 millions cans
per year.
The company plans to introduce the product through major metropolitan
newspaper ads. These ads should reach about 65 percent of the market.
These adds will provide a coupon allowing a $0.20 discount on the first
can purchased. Retailers will receive regular margin and be reimbursed
by Super Cola for the coupons. It is expected that the coupon redemption
rate is one coupon for every five cans sold. The cost of the newspaper
advertising campaign (excluding the coupon redemption) will be
$250,000. Other anticipated fixed overhead costs are $90,000 per year.
Other pertinent financial data are:
Price
Labor and Materials
Retailer Margin
Wholesaler Margin
=$0.50 per unit
=$0.24 per unit
=20%
=10%
a.
b.
c.
d.
What is the selling price to the wholesaler?
What is the contribution per unit for Total?
What is the break even volume in the first year?
What is the first year break even share of the relevant market?
NOTE: R&D is generally treated as a sunk cost.
4.
The ABC company is considering introducing a mid-priced
version of the forms PC 4000 personal computer product line. The new
product, the PC 4000X would sell for $3900 with AVC of $1800.
Marketing Research reveals:
• First year sales of 500,000 units for the PC 4000X.
• Half of the PC 4000X sales would come from loss competitor
sales and market growth.
• 30 percent of the PC 4000X sales would come from the higher
priced PC 4000 Deluxe which sells for $5900 and has an AVC
of $2200.
• 20 percent of the PC 4000X sales would come from the lower
priced PC 4000 Basic which sells for $2500 with an AVC of
1200.
• Forecast of sales for PC 4000 Deluxe and PC 4000 Basic for
next year are 400,000 units and 600,000 units, respectively,
without the new product.
The fixed cost of launching the new product is estimated to be $2
million. Should ABC add the new product?