Question

You have just been appointed the product manager of the "Vesuvius" counter top vegetable steamers in a large consumer products company. As part of your new job, you want to develop an understanding of the financial situation for your product. Your brand assistant has provided you with the following facts:

a. Retail selling price $50 per unit
b. Retailer's margin 20%
c. Jobber's margin 15%
d. Wholesaler's margin 23.5%
e. Direct factory labor $2 per unit
f. Raw materials $1 per unit
g. All factory and administrative overheads $2 per unit (if unit volume = 100,000)
h. Salesperson's commissions 10% of manufacturer's selling price
i. Sales force travel costs $215,000
j. Advertising $900,000
k. Total market for counter top vegetable steamers 1 million units
l. Current yearly sales of "Vesuvius" 190,000 units
Questions
1. What is the contribution per unit for the "Vesuvius" brand?
2. What is the break-even-volume in units and in dollars?
3. What market share does the Vesuvius brand need to break even?
4. What is the current total contribution?
5. What is the current before-tax profit of the Vesuvius brand?
6. What market share must Vesuvius obtain to contribute a before tax profit of exactly $3.9 million?

Answer 1

Vesuvius

1. The contribution per unit for the "Vesuvius" brand is:

= $25.60.

2. The break-even volume in units and in dollars:

Break-even volume in units = FC/Contribution per unit

= $1,115,000/$25.60

= 43,555 units

Break-even volume in dollars = FC/Contribution margin ratio

= $1,115,000/0.753

= $1,480,745

3. Market share that the Vesuvius brand needs to break-even is:

= 4.36%

4. The current total contribution is:

= $4,864,000

5. The current before-tax profit of the Vesuvius brand is:

= $3,749,000

6. The market share that Vesuvius must obtain to contribute a before tax profit of exactly $3.9 million is:

= 19.59%

Step-by-step explanation:

a) Data and Calculations:

a. Retail selling price $50 per unit

b. Retailer's margin 20%

c. Jobber's margin 15%

d. Wholesaler's margin 23.5%

e. Direct factory labor $2 per unit

f. Raw materials $1 per unit

g. All factory and administrative overheads $2 per unit (if unit volume = 100,000)

h. Salesperson's commissions 10% of manufacturer's selling price

i. Sales force travel costs $215,000

j. Advertising $900,000

k. Total market for counter top vegetable steamers 1 million units

l. Current yearly sales of "Vesuvius" 190,000 units

Total fixed costs = $1,115,000 ($215,000 + $900,000)

Variable Costs:

Direct materials per unit = $1

Direct labor cost per unit = $2

Total direct costs per unit = $3

Variable overhead costs per unit = $2

Total factory costs per unit = $5

Total factory costs for 100,000 units = $500,000

Wholesaler's selling price = $50 * (100% - 20) * (100% - 15) = $34

Sales commission = 10% of $34 = $3.4

Total variable cost per unit = $8.40 ($5 + $3.40)

Contribution margin per unit = $25.60 ($34 - $8.40)

Contribution margin ratio = $25.60/$34 = 75.3%

Market share to break-even = Break-even units/Market size * 100

= 43,555/1,000,000 * 100 = 4.36%

The current total contribution = $25.60 * 190,000

= $4,864,000

Total fixed costs = $1,115,000

Current before-tax profit = $3,749,000

Market Share to contribute a before-tax profit of exactly $3.9 million:

= (Fixed cost + Target profit)/Contribution per unit

= ($1,115,000 + $3,900,000)/ $25.60

= 195,898/1,000,000 * 100 = 19.59%