Baby Center Ltd Baby Center Ltd. makes portable high chairs. The high chair is g
ID: 340757 • Letter: B
Question
Baby Center Ltd Baby Center Ltd. makes portable high chairs. The high chair is generally marketed through exclusive retailers located in upscale shopping malls. In late 2017, Diana Suarez, the president of the company, was considering an alternative marketing plan for 2018 that was presented to her by Bill Duffy, the marketing manager. Based on sales from January through October 2017, Diana expected that 2018 sales would amount to 30,000 units Bill's alternative marketing plan is presented below: 2018 Marketing Plan: "At the present time, we sell the product to retailers for $58.00 per high chair. Retailers generally charge the consumers between $64.99 and $69.99. If we cut our selling price to retailers to $56.00, I expect that the product will do much better. Their increased markup will give them the incentive to display our product more prominently and to promote it more vigorously to customers. We should support this strategy by supplying more promotional materials to retailers, which I expect would be an increase of $5,000 in Advertising and Promotion costs. Based on the price cut and the increase in advertising and promotion, I expect that we will be able to boost our sales volume by 25 percent to 37,500 units in 2018." Diana received cost data from the company's CFO, Don Capp. Don expects that the cost data below are also reliable estimates for 2018 for a production volume up to 40,000 units. Beyond 40,000 units, the company would have to rent additional machines (with a capacity of 10,000 units each), which would increase fixed manufacturing overhead costs by $8,000 per machine 2017 Cost Data Manufacturing Costs for high chairs (based on production volume of 30,000 units) Direct Materials Direct Labor Packaging Variable Manufacturing Overhead $2.50 per unit Fixed Manufacturing Overhead $140,000 $22 per unit $16 per hour (each worker can make 2 units in 1 hour) $3 per unit Selling and Administrative Costs for high chairs (based on sales volume of 30,000 units) $5.80 per unit $4.00 per unit Sales Commissions Shipping Costs Advertising and Promotion (fixed) $15,000 Fixed Selling and Admin Expenses $12,000Explanation / Answer
Estimated Sale Units 37500 New Selling Price per unit 56 Variable Cost: Direct Material 22 Direct Labor 16 Packagin 3 Variable overherad 2.5 Sale Commission 5.8 ShippingCost 4 Total Variable Cost 53.3 Contribution Margin (SP-Variable cost) 2.7 Fixed Cost: FIxed Manufacturing Overhead 140000 Ad and Promotion 15000 Selling and admin 12000 Additional cost as per new plan 5000 Total Fixed Cost 172000 Break even point (Fixed cost/contribution) 63704 Based on above original fixed cost, BEP is 63704. But with increase from 40000 units, every 10000 units will be needing additional fixed cost of 8000. 24000 additional FC for 72k, 32000 additional Fc Contribution Margin 2.7 2.7 2.7 Fixed Cost 172000 196000 204000 BEP 63704 72593 75556 So final break even is 75556
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