Variable Costs and Fixed Costs ProblemOUV has spent $2,000,000 in R&D to develop a new product. The company plans tosell...
Get help with any kind of assignment - from a high school essay to a PhD dissertation
Variable Costs and Fixed Costs Problem
OUV has spent $2,000,000 in R&D to develop a new product. The company plans to
sell the product for $10 per unit. It will cost $2 in materials and $1 in labor to produce
each unit. OUV plans to run an advertising campaign at a cost of $20,000. The
advertising campaign will include a $2 coupon inserted in Sunday newspapers. OUV
expects 15% of its sales to be made with a coupon. It also plans to send a postcard
to 5,000 customers on a mailing list at a cost of $.50 each. OUV plans to hire one
sales representative at a salary of $50,000 per year plus a 5% commission. OUVâs
rent and utilities will be $15,000 per month, and its administrative and clerical
expenses are budgeted at $120,000 per year.
What are the relevant annual fixed costs?
What are the variable costs per unit?
1
Gross Margin Problem
Imagine a situation where a company sells 100 units of a product at a price of $1.00
per unit and with COGS of $0.40 per unit.
What is the companyâs gross profit margin in dollars?
What is the companyâs unit contribution in dollars?
What is the companyâs contribution margin percentage?
2
Trade Margin Percent of Selling Price Problem
Suppose a manufacturer suggests a retail list price of $6.00 on an item, and the
manufacturerâs COGS are $2.00 per unit. The channel of distribution includes
wholesalers and retailers. The wholesalers have a policy of obtaining a 20% margin
based on selling price, and retailers have a policy of obtaining a 40 percent margin
based on selling price.
What price will the wholesaler sell the item to the retailer?
What price will the manufacturer sell the item to the wholesaler?
What is the manufacturer's gross margin percentage?
3
Trade Margin Markup over Cost Problem
Suppose a manufacturerâs COGS are $2.00 per unit. The channel of distribution
includes wholesalers and retailers. The manufacture has a policy of obtaining a
30.6% markup over cost, wholesalers have a policy of obtaining a 20% markup over
cost, and retailers have a policy of obtaining a 40 percent markup over cost.
What price will the manufacturer sell the item to the wholesaler?
What price will the wholesaler sell the item to the retailer?
What price will the retailer sell the item to the consumer?
4
Margin Analysis Problem
The ZYX Company makes a product that costs $3 to produce, is sold to retailers for
$5, and has a Manufacturer's Suggested Retail Price (MSRP) of $10. The PQR
Company makes a product that costs $2.50 to produce, is sold to retailers for $4, and
has a MSRP of $8. The ZYX Company is considering the introduction of a second
product. This product will have a Unit Price of $4.50, will cost $2.25 to produce, and
will have a MSRP of $8.25.
Complete the margin analysis table below.
ZYX
Product
1
ZYX
Product
2
PQR
Produc
t
Retail Price
Retailersâ Unit Contribution
Retailersâ Gross Margin Percentage
Manufacturer's Unit Price
Manufacturer's Unit Variable Cost
Manufacturer's Unit Contribution
Manufactureâs Gross Margin Percentage
Based on margin analysis, what product will ZYX prefer consumers buy, its
higher priced Product 1 or its lower priced Product 2?
Based on margin analysis, what product will retailers prefer customers buy?
Based on margin analysis, is the retailer more likely to promote ZYXâs Product
2 or PQRâs Product?
5
Pro Forma Income Statement Problem
Sales for the upcoming year are forecasted to be 100,000 units. The product is
priced at $10 per unit. The product contains $0.35 of materials per unit and costs
$0.15 per unit to assemble. One ad will run for the product each month at a cost of
$7,500 per ad. There are two sales people each earning a base salary of $35,000
per year plus 10% commission. The product is shipped in cases of 100 at a cost of
$40 per case to deliver. Administrative salaries total $120,000; depreciation will be
$20,000; and interest, property taxes, and other administrative expenses are
forecasted at $5,000 each.
Complete the pro forma income statement below.
Pro Forma Income Statement for the 12-Month Period
Ended December 31, 20XX
Sales
Cost of goods sold
Gross margin
Marketing expenses
Sales expenses
Advertising expenses
Freight or delivery expenses
$
_________
$
%
%
%
$
$
General and administrative expenses
Administrative salaries
Depreciation
Interest expense
Property taxes and insurance
Other administrative expenses
Net income (before income tax)
%
%
%
%
%
%
%
%
%
%
%
$
Marketing expenses represent what percentage of sales?
What is the projected net income?
Total Breakeven Value Problem
The ZYX Company makes a product that has a MSRP of $9 and gives retailers a $4
6
profit margin. The unit variable cost is $3. Fixed costs include $17,000,000 for
consumer advertising, $5,000,000 for consumer promotion, $12,000,000 for trade
promotion, a $20,000,000 sales force budget, and $6,000,000 for general and
administrative expenses.
What is the breakeven volume in units for ZYX?
What is the breakeven dollars for ZYX?
IBEV for Change in Fixed Cost Problem
The ZYX Company makes a product that has a MSRP of $9 and gives retailers a $4
profit margin. The unit variable cost is $3. The ZYX Company is considering a
$15,000,000 increase in its advertising budget.
What is the breakeven volume in units for the increase in advertising?
7
IBEV for Change in Contribution Problem
Assume that the ZYX Company normally sells 90,000,000 units and is considering a
price cut from $5.00 to $4.50 on its product. The unit variable cost of the product is
$3.
How much must sales increase in units in order for ZYX to breakeven on the
price cut?
IBEV for Complex Changes Problem
Assume that the ZYX Company normally sells 90,000,000 units and is considering a
price cut from $5.00 to $4.50 on its product. The unit variable cost of the product is
$3. At the same time, ZYX plans to increase advertising by $15,000,000.
How much must sales increase in units in order for ZYX to breakeven these
changes?
8
Segment Value Problem
The ZYX Company makes a product that has a MSRP of $9 and gives retailers a $4
profit margin. ZYXâs product sells at a premium; the average retail price for the
industry is only $7. The unit variable cost for ZYX is $3. The target market for the
ZYX Company is baby boom adults in the U.S. population. Baby boomers are
individuals born between 1946 and 1964 and comprise approximately 24 percent of
the U.S. population. There are approximately 300 million people in the U.S.
population. Eighty percent of baby boomers consume at least one unit/year in ZYX's
product category, and, among these, the average usage rate is five units/year.
What is the market size in units?
What is the market size in revenue in retail dollars?
What is the segment value of the product category for ZYX?
9
Market Share Problem
The ZYX Company makes a product that has a MSRP of $9 and gives retailers a $4
profit margin. Assume that the ZYX Company normally sells 90,000,000 units. ZYXâs
product sells at a premium; the average retail price for the industry is only $7. The
unit variable cost for ZYX is $3. The target market for the ZYX Company is baby
boom adults in the U.S. population. Baby boomers are individuals born between
1946 and 1964 and comprise approximately 24 percent of the U.S. population. There
are approximately 300 million people in the U.S. population. Eighty percent of baby
boomers consume at least one unit/year in ZYX's product category, and, among
these, the average usage rate is five units/year.
What is the retail revenue market share for ZYX?
Breakeven Market Share Problem
The ZYX Company is considering two new products and needs to decide which one
to launch. Both products have the same price and cost structure. Both products will
have a selling price of $5. The unit variable cost for either product will be $3, and
fixed costs for either product will be $2,500,000. Both products are sold through
retailers. The market for Product 1 is estimated to be 25,000,000 in units. The market
for Product 2 is estimated to be $500,000,000 at retail. Retailers for Product 2 have
trade margins of 40% based on price.
Calculate revenue breakeven market shares for both products so that these values
can be used by management to decide which product to launch.
What is the dollar breakeven market share for Product 1?
What is the dollar breakeven market share for Product 2?
Based on breakeven market share, which product should they launch?
Cannibalization Problem
Brand X currently has an opaque white toothpaste on the market and is planning to
introduce a new gel toothpaste. The opaque white toothpaste sells for $1.00 a tube
with unit variable costs of $0.20 per tube. The new gel toothpaste will sell for $1.10 a
tube with unit variable costs of $0.40 per tube. The company expects to sell 1 million
10
units of the new gel toothpaste in the first year. Of that amount, 500,000 units will be
diverted from the opaque white toothpaste, of which the company had expected to
sell 1 million units.
How will the introduction of the new gel toothpaste affect Brand X's total
contribution dollars?
BECR Problem
The ZYX Company sells a product for $5 per unit with unit variable costs of $3. It is
considering the introduction of a second product. This new product will not require
additional promotional expenditures (fixed costs). It will have a Unit Price of $4.00
and cost $2.50 to produce.
What is the BECR for the new product?
11
Economic Value to the Customer Problem
The ZYX Company currently manufactures its product in an antiquated factory in
Anytown, USA. It spends $2 million per year in machine repair and another $500,000
in overtime labor due to repair-related downtime. The ABC company offers a threeyear service contract for factory machinery that it claims will cut these costs by onehalf. It also claims that the improved performance of well-maintained machines will
result in a 1 percent reduction in variable costs. Its maintenance program requires
that machine operators complete a one week training course that will cost ZYX $1
million. This training is required at the beginning of each three-year contract period.
ZYX currently produces 90,000,000 units a year with variable costs of $3.00 per unit.
ABC estimates that it will cost them $3 million to service the contract and wonders if
ZYX will be willing to pay $4.5 million.
What is the economic value of the ABC service contract for ZYX?
Based on the EVC should ZYX should be willing to buy the service contract?
12
OUV has spent $2,000,000 in R&D to develop a new product. The company plans to
sell the product for $10 per unit. It will cost $2 in materials and $1 in labor to produce
each unit. OUV plans to run an advertising campaign at a cost of $20,000. The
advertising campaign will include a $2 coupon inserted in Sunday newspapers. OUV
expects 15% of its sales to be made with a coupon. It also plans to send a postcard
to 5,000 customers on a mailing list at a cost of $.50 each. OUV plans to hire one
sales representative at a salary of $50,000 per year plus a 5% commission. OUVâs
rent and utilities will be $15,000 per month, and its administrative and clerical
expenses are budgeted at $120,000 per year.
What are the relevant annual fixed costs?
What are the variable costs per unit?
1
Gross Margin Problem
Imagine a situation where a company sells 100 units of a product at a price of $1.00
per unit and with COGS of $0.40 per unit.
What is the companyâs gross profit margin in dollars?
What is the companyâs unit contribution in dollars?
What is the companyâs contribution margin percentage?
2
Trade Margin Percent of Selling Price Problem
Suppose a manufacturer suggests a retail list price of $6.00 on an item, and the
manufacturerâs COGS are $2.00 per unit. The channel of distribution includes
wholesalers and retailers. The wholesalers have a policy of obtaining a 20% margin
based on selling price, and retailers have a policy of obtaining a 40 percent margin
based on selling price.
What price will the wholesaler sell the item to the retailer?
What price will the manufacturer sell the item to the wholesaler?
What is the manufacturer's gross margin percentage?
3
Trade Margin Markup over Cost Problem
Suppose a manufacturerâs COGS are $2.00 per unit. The channel of distribution
includes wholesalers and retailers. The manufacture has a policy of obtaining a
30.6% markup over cost, wholesalers have a policy of obtaining a 20% markup over
cost, and retailers have a policy of obtaining a 40 percent markup over cost.
What price will the manufacturer sell the item to the wholesaler?
What price will the wholesaler sell the item to the retailer?
What price will the retailer sell the item to the consumer?
4
Margin Analysis Problem
The ZYX Company makes a product that costs $3 to produce, is sold to retailers for
$5, and has a Manufacturer's Suggested Retail Price (MSRP) of $10. The PQR
Company makes a product that costs $2.50 to produce, is sold to retailers for $4, and
has a MSRP of $8. The ZYX Company is considering the introduction of a second
product. This product will have a Unit Price of $4.50, will cost $2.25 to produce, and
will have a MSRP of $8.25.
Complete the margin analysis table below.
ZYX
Product
1
ZYX
Product
2
PQR
Produc
t
Retail Price
Retailersâ Unit Contribution
Retailersâ Gross Margin Percentage
Manufacturer's Unit Price
Manufacturer's Unit Variable Cost
Manufacturer's Unit Contribution
Manufactureâs Gross Margin Percentage
Based on margin analysis, what product will ZYX prefer consumers buy, its
higher priced Product 1 or its lower priced Product 2?
Based on margin analysis, what product will retailers prefer customers buy?
Based on margin analysis, is the retailer more likely to promote ZYXâs Product
2 or PQRâs Product?
5
Pro Forma Income Statement Problem
Sales for the upcoming year are forecasted to be 100,000 units. The product is
priced at $10 per unit. The product contains $0.35 of materials per unit and costs
$0.15 per unit to assemble. One ad will run for the product each month at a cost of
$7,500 per ad. There are two sales people each earning a base salary of $35,000
per year plus 10% commission. The product is shipped in cases of 100 at a cost of
$40 per case to deliver. Administrative salaries total $120,000; depreciation will be
$20,000; and interest, property taxes, and other administrative expenses are
forecasted at $5,000 each.
Complete the pro forma income statement below.
Pro Forma Income Statement for the 12-Month Period
Ended December 31, 20XX
Sales
Cost of goods sold
Gross margin
Marketing expenses
Sales expenses
Advertising expenses
Freight or delivery expenses
$
_________
$
%
%
%
$
$
General and administrative expenses
Administrative salaries
Depreciation
Interest expense
Property taxes and insurance
Other administrative expenses
Net income (before income tax)
%
%
%
%
%
%
%
%
%
%
%
$
Marketing expenses represent what percentage of sales?
What is the projected net income?
Total Breakeven Value Problem
The ZYX Company makes a product that has a MSRP of $9 and gives retailers a $4
6
profit margin. The unit variable cost is $3. Fixed costs include $17,000,000 for
consumer advertising, $5,000,000 for consumer promotion, $12,000,000 for trade
promotion, a $20,000,000 sales force budget, and $6,000,000 for general and
administrative expenses.
What is the breakeven volume in units for ZYX?
What is the breakeven dollars for ZYX?
IBEV for Change in Fixed Cost Problem
The ZYX Company makes a product that has a MSRP of $9 and gives retailers a $4
profit margin. The unit variable cost is $3. The ZYX Company is considering a
$15,000,000 increase in its advertising budget.
What is the breakeven volume in units for the increase in advertising?
7
IBEV for Change in Contribution Problem
Assume that the ZYX Company normally sells 90,000,000 units and is considering a
price cut from $5.00 to $4.50 on its product. The unit variable cost of the product is
$3.
How much must sales increase in units in order for ZYX to breakeven on the
price cut?
IBEV for Complex Changes Problem
Assume that the ZYX Company normally sells 90,000,000 units and is considering a
price cut from $5.00 to $4.50 on its product. The unit variable cost of the product is
$3. At the same time, ZYX plans to increase advertising by $15,000,000.
How much must sales increase in units in order for ZYX to breakeven these
changes?
8
Segment Value Problem
The ZYX Company makes a product that has a MSRP of $9 and gives retailers a $4
profit margin. ZYXâs product sells at a premium; the average retail price for the
industry is only $7. The unit variable cost for ZYX is $3. The target market for the
ZYX Company is baby boom adults in the U.S. population. Baby boomers are
individuals born between 1946 and 1964 and comprise approximately 24 percent of
the U.S. population. There are approximately 300 million people in the U.S.
population. Eighty percent of baby boomers consume at least one unit/year in ZYX's
product category, and, among these, the average usage rate is five units/year.
What is the market size in units?
What is the market size in revenue in retail dollars?
What is the segment value of the product category for ZYX?
9
Market Share Problem
The ZYX Company makes a product that has a MSRP of $9 and gives retailers a $4
profit margin. Assume that the ZYX Company normally sells 90,000,000 units. ZYXâs
product sells at a premium; the average retail price for the industry is only $7. The
unit variable cost for ZYX is $3. The target market for the ZYX Company is baby
boom adults in the U.S. population. Baby boomers are individuals born between
1946 and 1964 and comprise approximately 24 percent of the U.S. population. There
are approximately 300 million people in the U.S. population. Eighty percent of baby
boomers consume at least one unit/year in ZYX's product category, and, among
these, the average usage rate is five units/year.
What is the retail revenue market share for ZYX?
Breakeven Market Share Problem
The ZYX Company is considering two new products and needs to decide which one
to launch. Both products have the same price and cost structure. Both products will
have a selling price of $5. The unit variable cost for either product will be $3, and
fixed costs for either product will be $2,500,000. Both products are sold through
retailers. The market for Product 1 is estimated to be 25,000,000 in units. The market
for Product 2 is estimated to be $500,000,000 at retail. Retailers for Product 2 have
trade margins of 40% based on price.
Calculate revenue breakeven market shares for both products so that these values
can be used by management to decide which product to launch.
What is the dollar breakeven market share for Product 1?
What is the dollar breakeven market share for Product 2?
Based on breakeven market share, which product should they launch?
Cannibalization Problem
Brand X currently has an opaque white toothpaste on the market and is planning to
introduce a new gel toothpaste. The opaque white toothpaste sells for $1.00 a tube
with unit variable costs of $0.20 per tube. The new gel toothpaste will sell for $1.10 a
tube with unit variable costs of $0.40 per tube. The company expects to sell 1 million
10
units of the new gel toothpaste in the first year. Of that amount, 500,000 units will be
diverted from the opaque white toothpaste, of which the company had expected to
sell 1 million units.
How will the introduction of the new gel toothpaste affect Brand X's total
contribution dollars?
BECR Problem
The ZYX Company sells a product for $5 per unit with unit variable costs of $3. It is
considering the introduction of a second product. This new product will not require
additional promotional expenditures (fixed costs). It will have a Unit Price of $4.00
and cost $2.50 to produce.
What is the BECR for the new product?
11
Economic Value to the Customer Problem
The ZYX Company currently manufactures its product in an antiquated factory in
Anytown, USA. It spends $2 million per year in machine repair and another $500,000
in overtime labor due to repair-related downtime. The ABC company offers a threeyear service contract for factory machinery that it claims will cut these costs by onehalf. It also claims that the improved performance of well-maintained machines will
result in a 1 percent reduction in variable costs. Its maintenance program requires
that machine operators complete a one week training course that will cost ZYX $1
million. This training is required at the beginning of each three-year contract period.
ZYX currently produces 90,000,000 units a year with variable costs of $3.00 per unit.
ABC estimates that it will cost them $3 million to service the contract and wonders if
ZYX will be willing to pay $4.5 million.
What is the economic value of the ABC service contract for ZYX?
Based on the EVC should ZYX should be willing to buy the service contract?
12
