Question

A manufacturer of high quality protein powder currently sells directly to consumers for $60 per container of protein. They are considering using a wholesaler and selling a case of 6 containers for $200 to their wholesalers. The wholesaler will want to collect a 40% margin on their sales. The retailer expects a 20% margin. The variable costs per container of protein is $7.50. The manufacturer has fixed costs of $15,000 per month.

This is an illustration of the distribution channel of the new indirect sales method
Channel Member. Margin. Selling Price for case of 6. Selling Price per case.
Manufacturer. $200 $33.33
Wholesaler. 40%. $200+40% of $200=$280. $46.47
Retailer. 20%. $280+20% of $280=$336 $56
Question.
The manufacturer currently sells 500 containers in a month. The new wholesale arrangement will see sales increase by 1000 containers. Would you sign a contract with the new wholesaler? WHY or WHY NOT?

Answer 1

The manufacturer should sign a contract with the new wholesaler because it would result in a significantly higher profit. Currently, the manufacturer sells 500 containers of protein powder per month for a profit of $11,250. With the new wholesaler arrangement, the manufacturer could sell 1000 cases per month for a profit of $181,250.

Step-by-step explanation:

To determine whether the manufacturer should sign a contract with the new wholesaler, we need to compare the total costs and revenues. Currently, the manufacturer sells 500 containers of protein powder per month at a price of $60 per container, resulting in a total revenue of $30,000. The total cost for the manufacturer is given by the sum of the variable costs per container ($7.50) multiplied by the number of containers sold (500), plus the fixed costs ($15,000). This gives a total cost of $3,750 + $15,000 = $18,750. Therefore, the profit for the manufacturer is $30,000 - $18,750 = $11,250 per month.

Now, let's consider the new wholesale arrangement. The manufacturer will sell a case of 6 containers for $200 to the wholesaler, who will want to collect a 40% margin on their sales. This means the wholesaler will sell the case for $280. The manufacturer's revenue per case will be $200, and since they sell 1000 cases per month, their total revenue will be $200,000. The total cost will be the sum of the variable costs per case ($7.50 per container multiplied by 6 containers) multiplied by the number of cases sold (1000), plus the fixed costs. This gives a total cost of $3,750 + $15,000 = $18,750. Therefore, the profit for the manufacturer is $200,000 - $18,750 = $181,250 per month.

Comparing the two scenarios, signing a contract with the new wholesaler would result in a higher profit for the manufacturer, as the profit would increase from $11,250 per month to $181,250 per month. Therefore, it would be beneficial for the manufacturer to sign a contract with the new wholesaler.