One of the first decisions you
One of the first decisions you have to make as the brand managerfor Verona coffee is whether or not to add a new line of coffeemakers called the “Super-Verona” line. The line would be marketedin addition to the original Verona line. Your brand assistant hasprovided you with the following facts:
– The manufacturer sells to the wholesaler. The wholesaler sellsto the jobber who, in turn, sells to the retailer.
– You are a part of the company that manufactures Verona. Hence,you have to view this problem from the perspective of themanufacturer of the product(and not from the middlemen).
a. Retail SellingPrice……………………………………………………………………………………………$100/unit
b. Retailer’sMargin………………………………………………………………………………………………..32%
c. Jobber’sMargin…………………………………………………………………………………………………..25%
d. Wholesaler’sMargin…………………………………………………………………………………………….20%
e. Direct FactoryLabor……………………………………………………………………………………………..$3/unit
f. RawMaterials……………………………………………………………………………………………………….$6/unit
g. Additional Factory and AdminOverheads…………………………………………………………………$4/unit
h. Salesperson’s Commision……………………………………………………………………………………..10%(ofmanufacturer’s selling price)
i. Incremental Sales Force TravelCost…………………………………………………………………………$95,000
j.Advertising……………………………………………………………………………………………………………..$750,000
k. New EquipmentNeeded…………………………………………………………………………………………..$120,000(tobe depreciated over 10 years)
l. Research and Development Spent up tonow……………………………………………………………….$250,000
m. Research and Development to be spent this year tocommercialize the product……………… $625,000(to beammortized over 5 years)
Questions:
1. What is the contribution per unit of the Super-Veronabrand?
2. What is the break-even volume in units and in dollars?
3. What is the sales volume in units necessary for Super Veronato yield in the first year, a 16% return on the equipment to beinvested in the project?
4. The $100 selling price for Super Verona seems high to you.You thought you might lower the price to $88/unit and raise retailmargin to 36%. What is the new break-even volume in units?
Answer:
Price charged by the producer = Retail price / (1- margin%)
= 100/ ((1+.32)x(1+.25)x(1+.20))
= $100 / 1.98
= $50.51
Total variable cost per unit = Raw material + Direct labor
= $3+ $6
= $9
Contribution per unit = Price charged by the producer – Totalvariable cost per unit
= $50.51 -$9
= $41.51
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