Question

1. Your new company is planning to make and sell customized mailboxes. You have set startup costs of $2046. Each mailbox costs you $34 to make. If you plan to sell your mailboxes for $49.50, how many must you make and sell to break even? Explain the how you determined the answer.

2. If the retail price is fixed at $1.00, what effect does increasing the retail and wholesale margins have on the manufacturer's selling price? Explain why this is the case.
3. Define unit contribution in your own words. Is a high or low unit contribution preferable for profitability?
4. How do increases in the retail and wholesale margins (again, with a fixed retail price) affect the unit contribution? Why?
5. If you increase any of the fixed cost factors, what happens to the number of units the company needs to sell to break even? To the market share necessary to achieve breakeven?
6. What change (increase or decrease) to the following factors increases the profit impact?
a) Decreasing retail margin/unit increases profit impact.
b) Increasing brand market share increases profit impact.
c) Decreasing advertising budget increases profit impact.
7. Many marketing decisions have multiple consequences. 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.

Answer 1

To break even, the company must sell 132 custom mailboxes. Increasing margins reduces the manufacturer's selling price when retail price is fixed. High unit contribution is preferred; higher fixed costs raise break-even thresholds, and adjusting factors such as margins, market share, and advertising budget can increase profits but must be managed to avoid conflicts.

Step-by-step explanation:

To determine the break-even point for the customized mailbox company, we use the formula:

Break-even point (units) = Fixed Costs / (Selling Price per Unit - Variable Cost per Unit)

In this instance, Fixed Costs = $2046, Selling Price per Unit = $49.50, and Variable Cost per Unit = $34.

Break-even point = $2046 / ($49.50 - $34) = $2046 / $15.50 = 132 units (rounded up from 131.677)

Therefore, 132 mailboxes must be made and sold to break even.

When the retail price is fixed at $1.00, increasing the retail and wholesale margins will reduce the manufacturer's selling price because the margins take a larger proportion of the fixed retail price, leaving less for the manufacturer.

Unit contribution is the amount each unit contributes to covering fixed costs and generating profit, calculated as Selling Price per Unit minus Variable Cost per Unit. A high unit contribution is preferable for profitability as it means more profit is made per unit sold.

If fixed retail price rises and wholesale margins increase, the unit contribution decreases, because the margins subtract more from the possible contribution to fixed costs and profit.

Increasing any of the fixed cost factors raises the number of units needed to break even and the market share necessary to achieve breakeven, as higher fixed costs must be covered by sales of more units.

Adjusting factors such as decreasing retail margin/unit, increasing brand market share, and decreasing advertising budget can increase profit impact but must be balanced carefully to avoid conflicts that could ultimately reduce profits.

For example, a decrease in retail margin/unit may increase profit per unit but could make it difficult to find retail partners. Increasing brand market share generally increases profits but may require higher advertising costs. Conversely, decreasing the advertising budget can reduce costs but could also reduce market share and sales volume, potentially lowering overall profits.