PROBLEM 4 (4 pts) A leading competitor in the electronics industry has been oper

Question

PROBLEM 4 (4 pts) A leading competitor in the electronics industry has been operating successfully.  The firm has enjoyed industry leading sales, gross margin and profits along with high levels of customer satisfaction and loyalty.   The firm’s marketing expenditures last year totaled $20 million.  The average product sold for $400 per unit.  The Vice President proposes to increase the firm’s marketing budget for the next fiscal year by 10%.  This firm’s Contribution Margin has been running at 40% of sales and would be expected to remain at that level.  No change in price is anticipated. a. How many additional units of this product would have to be sold to “recover” or break-even on the added $2 million in added marketing spending? b. To convince the firm’s CEO that the additional investment in marketing should be made, the VP wants to explain that the added investment would generate additional sales and profits for the firm.  The following information has been estimated for the next year with a marketing budget of $20 million. Total Sales Revenue          $400,000,000 Contribution Margin            $160,000,000 Net Margin                        $40,000,000 How much more in sales revenue (above $400 Million) would need to be generated by the added marketing expenditures of $2 Million to boost the firm’s net margin from the projected $40 million to $42 million – a 5% increase in profitability.   PROBLEM 4 (4 pts) A leading competitor in the electronics industry has been operating successfully.  The firm has enjoyed industry leading sales, gross margin and profits along with high levels of customer satisfaction and loyalty.   The firm’s marketing expenditures last year totaled $20 million.  The average product sold for $400 per unit.  The Vice President proposes to increase the firm’s marketing budget for the next fiscal year by 10%.  This firm’s Contribution Margin has been running at 40% of sales and would be expected to remain at that level.  No change in price is anticipated. a. How many additional units of this product would have to be sold to “recover” or break-even on the added $2 million in added marketing spending? b. To convince the firm’s CEO that the additional investment in marketing should be made, the VP wants to explain that the added investment would generate additional sales and profits for the firm.  The following information has been estimated for the next year with a marketing budget of $20 million. Total Sales Revenue          $400,000,000 Contribution Margin            $160,000,000 Net Margin                        $40,000,000 How much more in sales revenue (above $400 Million) would need to be generated by the added marketing expenditures of $2 Million to boost the firm’s net margin from the projected $40 million to $42 million – a 5% increase in profitability.  

Explanation / Answer

Answer to question # a :

Contribution margin per unit = 40 % of $400 =$160

Let the additional units to be sold to breakeven on the additional marketing expenditure of $2 million = N

Therefore ,

Contribution margin / unit x N units = $ 2,000000

Or, 160 x N = 2,000000

Or, N = 12500

Additional units of this product to be sold = 12500

Answer to question b :

For the next year ;

Increase in net margin = 442 - $40 million = $ 2 million

Increase in marketing expenditure = $2 million

Increase in contribution margin

= Increase in net margin + increase in marketing expenditure

= $ 2 million + $ 2 million

= $ 4 million

It is to be noted that contribution margin = 40 % ( i.e. 0.4) of Total sales revenue

Therefore , increase in total sales revenue for corresponding $ 4 million increase in contribution margin = $ 4 million /0.4 = $10 million

Additional quantum of sales revenue required =$10 million

Additional units of this product to be sold = 12500

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