1.

Etier Designs is producing a line of high-end silk scarves to be sold in high-end

department stores. The manufacturer’s suggested retail price is $120 USD.

Retailer demands a 30% margin off the retail price,

Wholesaler demands a 40 % margin off the price at which he sells to the retailer.

Etier trading total cost of goods sold is $15 USD.

In the past, shin Etier has paid $30,000 for design consulting. Moving forward, Etier
plans to spend $50,000 in market research, $50,000 to rent production space, and an
additional $100,000 on an advertising campaign.

Please answer the following:

a. What price does the retailer pay the wholesaler?

= $120 – (120 * 30%) = $84

b. What price does the wholesaler pay Etier?

= $84 * 40% = $33.60

c. What is Etier’s mark up as a percentage of its costs?

= ($33.6 - $15)/15 = 1.24 or 124%

d. By what percent does the wholesaler mark-up its cost of goods sold?
= ($84 - $33.60)/$33.60*100 = 150%

e. By what percent does the retailer mark-up it’s cost?

= $120-$84=$36
=$36/$84*100 = 42.85%

f. What is total Etier’s (relevant) Fixed Cost?

= $50,000 + $50,000 + $100,000= $200,000

g. If we consider the COGS to be the total variable cost, how many units does
Etier have to produce to Break Even?
= $200,000/ $33.60 -$15 = 10,753 units

h. What is Etier’s Break Even in terms of (wholesale) dollars?

= $10,753 * $33.60 = $361,290.30

i. What’s is Etier’s Contribution per unit in dollars?

= $33.60 - $15.00 = $18.60
 j. What is Etier’s Contribution Margin?
= $33.60-$15/$33.60 = 55.35%

k. How many units would Etier have to sell to make a $50,000 profit (not just
break even?
= $200,000 + $50,000 / $18.60 =13,441

2. Suppose Coca Cola launches a new Tab energy drink. They have spent years and
approximately 500,000 on research and development and test marketing. They plan to
offer the drink only in urban areas representing 80% of the US Market which is
estimated at 100 million cans. When they launch, they plan to offer a $0.25 coupon per
bottle Historically, only 20% of US consumers actually redeem coupons. Coca Cola plans
to use an aggressive advertising and marketing campaign that represent fixed costs of
$3,000,000.

Suggested Retail Price

$1.20 bottle
Cost of Materials
$0.30/ bottle
Cost of Labor
$.05/ bottle
Coupon (with 20% redemption rate) $.25

Retail Margin
20% off retail price
Wholesaler Margin
20% of the retailer’s cost

A. What price does the retailer pay?

= $1.20 x $0.20 = $0.96

B. What price does the wholesaler pay?

= $0.96 x $0.20 = $0.77

C. What is Coke’s variable cost of goods sold per unit?

= $0.30 + $0.05 = $0.35 (coupon price excluded)

D. What is Coke’s contribution per unit?

= $0.77 - $0.35 – ($0.25*20%)= $0.37

E. How many units does Coke have to sell to break even?

 = $3,000,000/($0.77-$0.40) = 810,8108

F. At wholesale prices, what is Coke’s breakeven dollar amount.

= $810,8108 * $0.77 = $6,243,243

G. What percent of the relevant market would Coke need to capture to break even?

= Total Fixed Cost = $3,500,000

= Total Variable Cost Per Unit = $$0.30 + $0.05 + (25%*$0.20) =$0.40

= Contribution Margin Per Unit = $0.37

= $3,000,000/$0.37 = 8,108,108 units

Therefore, relevant market size = 80% of 100 million cans = 80,000,000

=8,108,108/80,000,000= 10.13% relevant market size needed to break-even

3. Blistex was reviewing price and promotion alternatives for two products in its line:
Regular Blixtex and Sensitive Lip Blistex. The price and promotion alternatives for the
two products by their respective brand managers include the possibility of using
additional promotion or a price reduction to stimulate sales volume.

Here’s what we know.

Blistex Regular Blistex Sensitive Lips

Unit Price $1.00 2.00

Unit Variable Costs 0.25 1.40

Unit Contribution
.75 .60

Unit volume 1,500,000 1,000,000

Both brand managers are considering either a price reduction of 5% or an incremental increase
of $100,000 in advertising.

a. What absolute increase in sales units and dollar sales will be necessary to recoup the
incremental increase in advertising expenditures for Regular? How about for Sensitive
Lips?

Blistex Regular

= $100,000 / 0.75 = 133.333 units

Increase in sales = 133.33 x $1.00 = $133,333

Blistex Sensitive

= $100,000 / 0.60 = 166,666 units

Increase in sales = 166,666 x $2.00 = $333,333

b. What is the absolute increase in unit sales and dollar sales will be necessary to maintain
the level of total contribution dollars if the price of each product is reduced by 5%?

Blistex Regular Lips

Current contribution = 1,500,000 * .75 = 1,125,000
Current price = $1.00
Reduced price = $1.00 – 5% = $0.95
Total sales unit = 1,125,000/.70 =1,607,143

Therefore, increase in sales unit = 1,607,143 - 1,500,000 = 107,143 unit

Increase in dollar sales = 1,107,143 * .95 = $101, 785.90

Blistex Sensitive Lips

Current contribution = 1,000,000 * .60 = 600,000
Current price = $2.00
Reduced price = $2.00 – 5% = $1.90
Total sales unit = 600,000/0.6 =1,200,000

Increase in sales unit = 1,200,000 – 1,000,000 = 200,000

Increase in dollar sales = 200,000 * 1.90 = $380,000