## Question

Overhead expenses $175,000

Advertising $100,000

Raw materials $5/unit

Labor $3/unit

Sales salaries $150,000

Commissions $1.50/unit

a. What is the contribution margin per unit?

b. What volume must be sold for the company to break-even on this product (both in units and dollar)?

c. What is the volume in units that must be sold for the firm to make $250,000 in profit?

d. What is the volume that must be sold if the firms wants to make 40% in profit from this product?

e. What happens to break-even volume (in both units and sales) if management decides to cut the price by 20%?

f. What happens to break-even volume if management decides to run a promotion that will cost the firm $50,000?

g. Industry experts suggest that the market demand for this product is 500,000 units per year. What percent market share must the company achieve to break-even?

2. Management has determined that their product should be sold to consumers at the retail price of $29.99. To manufacture the product, the firm spends $7.50 each for materials and labor. The company expects that retailers require a 30% margin in order to carry the product and wholesalers require a margin of 15%

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?

3. A firm has 3 products that it currently offers for sale. Product 1 sells for $30/unit and has a variable cost of $13/unit. Product 2 sells for $15/unit with variable cost of $6/unit. Product 3 sells for $5/unit with variable costs of $2/unit. Fixed costs are $130,000 for Product 1, $90,000 for Product 2 and $40,000 for Product 3. The expected volume for each product is as follows: Product 1 - 22,000; Product 2 - 30,000; Product 3 - 55,000.

a. Which product is more profitable? By how much?

4. Samsung currently sells four different models of high-definition televisions (Model 1, Model 2, Model 3, and Model 4). Model 1 sells for $500 with a variable cost of $200 and projected demand of 4,000 units. Model 2 sells for $600 with a variable cost of $275 and projected demand of 2,800 units. Model 3 sells for $700 with a variable cost $395 and projected demand of 2,000 units. Model 4 sells for $950 with a variable cost of $500 and projected demand of 1500 units. Samsung is considering launching Model 5 with a retail price of $1100 and variable cost of $700. The projected demand for this new model is 1,100. Management is worried about cannibalization and expects that the new product will cannibalize the sales of the other models as follows: 10 units from Model 1, 40 units from Model 2, 100 from Model 3, and 400 from Model 4. The fixed costs associated with the launch of the product are $200,000.

a. How much can Samsung expect their sales volume and profitability to increase with the launch of Model 5?

b. Should Samsung go forward with the launch? Why or why not?

5. What is the CLV if the cost of acquisition is $100, the average customers spends $200/year (and the cost of providing the service $80/year) and most customers stay with the firm for 10 years.

6. Use the following information to calculate the NPV for an overseas expansion:

Year Cash Flow

0 -$35,000

1 15,000

2 18,000

3 25,000

What is the NPV at a required return of 8%? Should the firm accept the project? What if the required return is 15%?

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