Overhead expenses $200,000
Raw materials $8.75/unit
Patent royalties $2.00/unit
Sales commission $1.50/unit
Salesperson salaries $300,000
a. What is the contribution margin per unit?
b. What volume must be sold for High-tech Inc. to break even (both in units and dollar)?
c. What is the volume in units that must be sold for the firm to make $300,000 in profit?
d. What happens to the break-even volume if managers decide to reduce the price by 15%?
e. What happens to the break-even volume if extra salespeople need to be hired (with a cost of $75,000)?
2. Management has determined that their product should sell for $10 per unit. To manufacture the product, the firm spends $2 each for materials and $1.35 for labor. The company expects that retailers will require a 20% margin in order to stock the product for customers to purchase and wholesalers will require a margin of at least 18%.
a. What price should the producer (or manufacturer) charge to wholesalers?
b. What is the contribution per unit for the product for the manufacturer? What percent margin does the manufacturer realize?
c. Management has spent $500,000 in R&D expenses developing the product. If they move forward with their proposed marketing plan, they expect to spend another $200,000 in advertising and promotion expenses (which is double what they spent last year). Overhead expenses associated with the launch of the product are estimated to be $50,000. What is the break-even volume required for the product?
d. Industry experts suggest that the market demand for this product is 650,000/year. What percent market share must the company achieve to break-even?
3. A firm has 3 products that it currently offers for sale. Product 1 sells for $22/unit and has a variable cost of $10/unit. Product 2 sells for $10/unit with variable cost of $4/unit. Product 3 sells for $3/unit with variable costs of $2/unit. Fixed costs are $120,000 for Product 1, $60,000 for Product 2 and $30,000 for Product 3. The expected volume for each product is as follows: Product 1 - 20,000; Product 2 - 35,000; Product 3 - 50,000.
a. Which product is more profitable? By how much?
4. Sprint is curious as to how much value each customer provides to the firm. Management has estimated that it currently costs $5 on average to acquire and attract a new customer. Most customers sign up for the $79.99/month phone plan with a margin of $61.99. Past audits of the firm's data suggests that most customers remain with Sprint for 7 years.
a. What is the CLV?
b. What if the salesperson upsells new customers to the premier plan of $99.99 per month with a cost of $20/month to the firm?
c. What happens to CLV if customer satisfaction decreases and retention drops to 2 years (the required time of the sales contract)?
5. Use the following information to calculate the NPV for an overseas expansion:
Year Cash Flow
What is the NPV at a required return of 9%? Should the firm accept the project? What if the required return is 19%?
6. Snapple is considering adding a new flavor tea to their product line - an energy drink that tastes like tea. Based on past experience they know that the sales of their current products will be impacted by the introduction of new flavors. Before launching their new tea, they want to understand the financial implications of cannibalization. Past research suggests that half of the demand for the new drink will come from the demand for the other products (i.e., cannibalized sales). Consider the following information:
Product Selling price Variable cost Demand Forecast Demand lost if new product is
Lemon Tea 0.99 0.30 5000 500
Diet Raspberry Tea 0.99 0.35 6000 400
Cherry Pomegranate 0.99 0.45 2500 350
Energy Tea 1.99 1.30 2000
a. How much can Snapple expect their sales volume to increase by introducing the new energy drink?
b. What will the increase in revenue likely be?
c. If the fixed costs associated with launching the new drink are $4,000, should Snapple go forward with the launch?
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