Problem

Product X is a consumer product with a retail price of $9.95. Retailer's margins on the product are 40% (based on the selling price to consumers) and wholesaler's margins are 8% (based on the selling price to retailers). The size of the market is $300,000,000 annually (based on retail sales); product X' share (in dollars) of this market is 17.3%. The fixed costs involved in manufacturing Product X are $1,400,000 and the variable costs are $0.86 per unit. The advertising budget for Product X is $2,000,000. Miscellaneous variable costs (e.g., shipping and handling) are $0.04 per unit. Salespeople are paid entirely by a 12% commission based on the manufacturer's selling price. Product manager's salary and expenses are $90,000. Assuming that you are the manufacturer, calculate the following:

1. What is the unit margin (contribution) for Product X (in $)?

2. What is Product X's break-even volume?

3. What market share (based on retail sales) did Product X need to break even?

4. What is Product X's (annual) net profit?

5. Calculate the increase in sales over the current volume needed to maintain the current profit level if the manufacturer doubles its advertising expenditures.

6. Calculate the increase in sales over the current volume needed to maintain the current profit level if the manufacturer lowers its price by 25%.

7. Calculate the increase in sales over the current volume needed to maintain the current profit level if the manufacturer increases the sales force's commission to 15%.