You have a prospective industrial distributor who is interested in carrying your

Question

You have a prospective industrial distributor who is interested in carrying your product but has asked for 3 cases free of the product for initial distribution and samples for their sales personnel who call on the factoris and warehouses that can resell your product. The distributor would need three cases for each of the 1500 warehousing operations that they manage across the United States. Your selling price is $12.00 to the distributor, and your gross margin is 25%.

What size order in addition to the initial free goods must you secure just to break even on this gamble?

When you propose this to your sales manager, he suggests that you simply pay your customer a flat $40,000 slotting allowance to cover his intial distribution cost, and that he purchase the stocking amounts right away to stock the warehouse. Is this a better solution, by how much, and why?

Explanation / Answer

Margin is 25% and profit is 25% of 12 = 3

Hence the cost is 12 - 3 = 9

So the loss on 1500 * 3 = 4500 units is 4500 * 9

profit per unit is 3

Hence he has to sell 4500 * 9 / 3 = 13500 units

The amount distributor has to pay for 4500 units is 4500 * 12 = 54000

Hence the savings is 54000 - 40000 = 14000

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