1.1. Elkins, a manufacturer of ice makers, realizes a cost of $250 for every unit it produces. Its total fixed costs equal $5 million. If the company manufactures 500,000 units, compute the following:
a. unit cost
b. markup price if the company desires a 10% return on sales
c. ROI price if the company desires a 25% return on an investment of $1 million
1.2. A gift shop owner purchases items to sell in her store. She purchases a chair for $125 and sells it for $275. Determine the following:
a. dollar markup
b. markup percentage on cost
c. markup percentage on selling price
1.3. A consumer purchases a coffee maker from a retailer for $90. The retailer’s markup is 30%, and the wholesaler’s markup is 10%, both based on selling price. For what price does the manufacturer sell the product to the wholesaler?
1.4. A lawnmower manufacturer has a unit cost of $140 and wishes to achieve a margin of 30% based on selling price. If the manufacturer sells directly to a retailer who then adds a set margin of 40% based on selling price, determine the retail price charged to consumers.
1.5. Advanced Electronics manufactures DVDs and sells them directly to retailers who typically sell them for $20. Retailers take a 40% margin based on the retail selling price. Advanced’s cost information is as follows:
DVD package and disc $2.50/DVD
Advertising and promotion $500,000
Calculate the following:
a. contribution per unit and contribution margin
b. break-even volume in DVD units and dollars
c. volume in DVD units and dollar sales necessary if Advanced’s profit goal is 20% profit on sales.
d. net profit if 5 million DVDs are sold
1.6 Alliance, Inc. sells gas lamps to consumers through retail outlets. Total industry sales for Alliance’s relevant market last year were $100 million, with Alliance’s sales representing 5% of that total. Contribution margin is 25%. Alliance’s sales force calls on retail outlets and each sales rep earns $50,000 per year plus 1% commission on all sales. Retailers receive a 40% margin on selling price and generate average revenue of $10,000 per outlet for Alliance.
a. The marketing manager has suggested increasing consumer advertising by $200,000. By how much would dollar sales have to increase to break even on this expenditure? What increase in overall market share does this represent?
b. Another suggestion is to hire two more sales representatives to gain new consumer retail accounts. How many new retail outlets would be necessary to break even on the increased cost of adding three sales reps?
c. A final suggestion is a make a 10% across-the-board price reduction. By how much would dollar sales have to increase to maintain Alliance’s current contribution?
d. Which suggestion do you think Alliance should implement? Explain your recommendation.
1.7 Hair Zone manufactures a brand of hair styling gel. It is considering adding a modified version of the product—a foam that provides stronger hold. Hair Zone’s variable costs and prices to wholesalers are:
Current hair gel New foam product
Unit selling price 2.00 2.25
Unit variable costs .85 1.25
Hair Zone expects to sell 1 million units of the new styling foam in the first year after introduction, but it expects that 60% of those sales will come from buyers who normally purchase Hair Zone’s styling gel. Hair Zone estimates that it would sell 1.5 million units of the gel if it did not introduce the foam. If the fixed cost of launching the new foam will be $100,000 during the first year, should Hair Zone add the new product to its line? Why or why not?