1. How do increases in the retail and wholesale margins (again, with a fixed ret
ID: 449993 • Letter: 1
Question
1. How do increases in the retail and wholesale margins (again, with a fixed retail price) affect the unit contribution? Be sure to explain why.
2. If you increase any of the fixed cost factors, what happens to:
A) the number of units the company needs to sell to break even and
B) the market share necessary to break even? If fixed costs rise, is this good, bad, or of no importance? Explain your answer.
3. What change (increase or decrease) to the following factors increases the profit impact and why?
A). Retail margin/unit
B). Brand market share
C). Advertising budget
4. Many marketing decisions have multiple implications. For example, while increasing price improves profit per unit, too large a price increase may decrease unit sales, ultimately decreasing profits overall. Keeping this kind of tradeoff in mind, explain how changes to the three factors mentioned in the prior question could potentially conflict with one another in terms of strategy for increasing the profit impact.
Explanation / Answer
Margin Structure Factors:
Retail Price:
$ 1.00
Retail Margin/Unit:
43%
Wholesale Margin/Unit:
12%
Variable Cost Factors:
Variable Mfg. Cost/Unit:
$ 0.09
Shipping, etc./Unit:
$ 0.02
Commissions:
10%
Wholesale Selling Price:
$ 0.57
Manufacturer's Selling Price:
$ 0.50
If the retail price remains fixed at $1.00 and there was an increase in retail and wholesale margins it would lead to a reduction in the manufacturer’s selling price. If the company increases the retail or wholesale margin it is also increasing the profit available to the company because it is calculated on the retail price. However, with no change in retail price because it remains fixed, the manufacturer would have to reduce its selling price in order to provide the extra benefit to the retailer or wholesaler.
Unit contribution for Brand X:
Retail Selling Price = $1.00
Retail Margin = 33% ($0.33)
Wholesaler Margin = 12% ($0.08)
Brand X Selling Price = 1.00 – (.33 + .12) = .59
Variable Costs = (Mnf) .09 + (Shipping) .02 + (Commission 10%) .059 = 0.169
Unit Contribution = .59 - .169 = $0.42
Retail margin is the amount of gross profit made when an item is sold.Therefore, when retail price for item is fixed and retail margin increases, it results in decrease in amount of profit made per unit when each item will be sold.Without increasing fixed retail price, retail margin has a direct impact on unit contribution and the profit impact.
Margin Structure Factors:
Retail Price:
$ 1.00
Retail Margin/Unit:
44%
Wholesale Margin/Unit:
12%
Variable Cost Factors:
Variable Mfg. Cost/Unit:
$ 0.09
Shipping, etc./Unit:
$ 0.02
Commissions:
10%
Unit Contribution:
$ 0.33
If retail prices remain fixed, profit margin will also get affected by the wholesale cost of the product.If wholesale margin is kept 12% then unit contribution is 0.42 which results in a profit impact of 584,072.If the wholesale margin increases to 22% then the unit contribution is 0.36(See second calculation of unit contribution below) which results in a profit impact of 294,632.We can conclude that as the wholesale margin increases,unit contribution value will decrease which will result in a decrease in profit impact.
Margin Structure Factors:
Retail Price:
$ 1.00
Retail Margin/Unit:
33%
Wholesale Margin/Unit:
22%
Variable Cost Factors:
Variable Mfg. Cost/Unit:
$ 0.09
Shipping, etc./Unit:
$ 0.02
Commissions:
10%
Unit Contribution:
$ 0.36
Break-even point is calculated by dividing fixed costs by contribution per unit.And in case of revenue it is calculated by dividing fixed costs by contribution margin.Therefore,it is obvious that increasing fixed costs will require high value of the volume needed to cover all of the costs. Increase in advertising budget results in very high increase in units need to be sold to cover costs by almost 1 million units.
Fixed Costs = Manufacturing Costs + Advertising Cost + Manager’s Salary
900,000 + 500,000 + 35,000 = 1,435,000
Break Even = 1,435,000/0.421 = 3,408,551 units/year
Market Share to Break-Even (BE/total market) *100 = 3,408,551/20,000,000)*100 = 17%
Brand/Market Share:With increase in brand/market share, the profit impact increases respectively.
Advertising Budget:With increase in the advertising budget increases by $100,000 the profit impact decreases by $100,000
Industry Demand = 23,000,000 units, Adv. Budget = $1,000,000
$1,935,000 / .42 = 4,607,143
($1,435,000 + $581,000 + $500,000) / $.42 = 5,990,476
5,990,476 / 23,000,000 = 26.05%
(.42 * X) – $1,935,000 = $1,000,000
X = 6,988,095
6,988,095 / 23,000,000 = 30.38%
New Retailer Margin = 40%
Unit Contribution = 1.00 – 40%(.4) – 12%(.072) - .09 - .02 - .059 = $0.366
$1,435,000 / .366 = 3,920,765
($1,435,000 + $581,000) / .366 = 5,508,197
5,508,197 / 23,000,000 = 23.95%
(.366 * X) – $1,435,000 = $350,000
X = 4,877,049
4,877,049/ 23,000,000 = 21.20%
Increase in retail margin caused profit impact of 30.38% and the new Retail margin caused profit impact of 21.20%. This kind of impact results in conflict in strategy of increasing profit impact that is you cannot increase the factors simultaneously. One factor need to be kept fixed or increased slowly as compared to others if you want to increase profit impact because as we can see if we are going to increase one factor the increase in other factor will tend to neutralize the effect of previous factor.
Star, S. H., Heskett, J. L., & Levitt, T. (1974). Note on marketing arithmetic and related marketing terms. HBS Case.
Retrieved from: https://cb.hbsp.harvard.edu/cb/pl/26533289/26825302/9ba63932f2ac76c16144f2c42775811f
Margin Structure Factors: Retail Price: $ 1.00 Market Factors: Total Units in Market: 20,000,000 Retail Margin/Unit: 33% Brand X Market Share: 24% Wholesale Margin/Unit: 12% Variable Cost Factors: Variable Mfg. Cost/Unit: $ 0.09 Fixed Cost Factors: Fixed Mfg. Costs: $ 900,000 Shipping, etc./Unit: $ 0.02 Advertising Budget: $ 500,000 Commissions: 10% Prod. Mgr. Salary: $ 35,000 Question 1: What is the unit contribution for Brand X? Key Formulas: Wholesale Selling Price = Retail Price x (100% - Retail Margin/Unit) Manufacturer's Selling Price = Wholesale Selling Price x (100% - Wholesale Margin/Unit) Commissions/Unit = Commission x Manufacturer's Selling Price Contribution per Unit = Manufacturer's Selling Price - Variable Costs/Unit Step 1: Determine Manufacturer's Selling Price Wholesale Selling Price: $ 0.67 Manufacturer's Selling Price: $ 0.59 Step 2: Determine Total Variable Costs Variable Mfg. Cost/Unit: $ 0.09 Shipping, etc./Unit: $ 0.02 Commission/Unit: $ 0.06 Total Variable Costs per unit: $ 0.17 Step 3: Determine Unit Contribution Unit Contribution: $ 0.42 Question 2: What is Brand X's break-even point? Key Formula: Breakeven Units = Fixed Costs divided by Unit Contribution Fixed Costs: $1,435,000.00 Breakeven Units: 3,411,468 Question 3: What market share does Brand X need to break even? Key Formula: Breakeven market share = Breakeven Units divided by Total Units in Market Breakeven Market Share: 17% Question 4: What is Brand X's profit impact? Key Formulas: Unit Volume = Total Units in Market x Market Share Profit Impact = (Unit Volume x Unit Contribution) - Fixed Costs Unit Volume: 4,800,000.00 Profit Impact: $ 584,072Related Questions
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