Question

For a consumer product, the manufacturer’s suggested retail price (MSRP) is $49. The manufacture’s price to the retailer is $25. The manufacturer faces a marginal cost of $15 per unit to produce. a. What is the current contribution margin for this product at the retail level if priced at the MSRP? What is the current contribution margin for this product at the manufacturer level? What is the current contribution margin for this product for the value chain if priced at the MSRP? b. What is the volume hurdle associated with a 15-percent-off sale at the retail level to leave the overall value chain more profi table? c. Assume that the retailer seeks to share the burden of a price discount with the manufacturer such that its promotional price is reduced by 15 percent while the price its pays for the product also decreases by 7.5 percent. What is the volume hurdle faced by both the retailer and manufacturer under this scenario? d. What decrease in manufacturer price to the retailer would deliver the same volume hurdle to both the retailer and manufacturer as a 15-percent-off sale at the retail level?

Answer 1

a. At the retail level, the contribution margin is $34. At the manufacturer level, it's $10.

b. The volume hurdle for a 15% off sale at the retail level is determined by dividing fixed costs by the contribution margin percentage
1 - Contribution Margin %

c. The volume hurdle, considering a shared burden, is calculated similarly to (b).

d. To match the volume hurdle of a 15% off retail sale, the equivalent manufacturer price decrease is computed.

a. At the retail level (MSRP):

Contribution Margin = MSRP - Manufacturer's Cost = $49 - $15 = $34

At the manufacturer level:

Contribution Margin = Manufacturer's Price to Retailer - Marginal Cost = $25 - $15 = $10

For the value chain (MSRP):

Contribution Margin = $34

b. The volume hurdle for a 15% off sale at the retail level is calculated by dividing the fixed costs by the contribution margin percentage
(1 - Contribution Margin %).

c. If the retailer and manufacturer share the burden, the new contribution margin for the retailer is
`\(\$25 * (1 - 0.075) - \$15\)`, and for the manufacturer, it remains $10. Use the same method as in (b) to find the volume hurdle.

d. To find the manufacturer price decrease equivalent to a 15% off retail sale, set the new contribution margin percentage equal to
1 - Contribution Margin % and solve for the manufacturer's price decrease.