Written Assignment 2 – Farris Chapter 3 – Margins and Breakeven Analysis

John has an idea for a new style of bicycle that he would like to introduce to the market. The manufacturing cost of the bicycle is $100 including packaging and shipping to wholesalers who will sell the product to retail stores. John’s fixed costs (as the manufacturer and including all mass media advertising general administrative overhead) are expected to be $2,500,000 for the entire planning period (3 years), including a $1,000,000 advertising budget. No cost changes are anticipated over the planning period. John anticipates providing his own sales agents with a 3% commission on each unit sold.   Competitors offer comparable bicycles for $500, and John feels the GPS system, back-pedal brakes, and patented seat will give his produce competitive advantage. Typically, bicycle wholesalers take a 25% margin (mark-up) on costs and retailers seek a 40% margin on sales. John has set a profit goal of $1,000,000 for the planning period.

Answer the following questions for each retail price level listed: $400, $500, $600, $700

Questions Retail Price to the End User

$400 $500 $600 $700

Units required for breakeven?

Sales revenue required for breakeven? $

Units required for financial goal?

Sales revenue required for financial goal? $

John’s unit contribution to profitability? $

John’s margin on costs? %

Wholesaler Margin ($) per unit

Retailer Margin ($) per unit

Please prepare answers for the following interpretative questions using your analyses above, and retail, wholesale, manufacturing data about bicycles from the US Bureau of the Census, and additional reputable data from Internet sources.

1. In the case description above, what are the fixed and what are the variable costs?

2. What would be a reasonable retail end-user price recommendation for John’s bicycle? Justify your recommendation in market terms and in terms of John’s financial goal.

3. How many units must be sold with your price recommendation to achieve John’s financial goal? Is this realistic given your data on the market?

4. Is John’s financial goal realistic? Justify your judgment in light of the data.    

5. Given your retail price recommendation, how many units must be sold to achieve John’s financial goal if he decides to give a $50 rebate as a new sales promotion to the first 200 end-user purchasers. Would this be a good promotion idea? Why?