Mark4210, Spring 2014: Quantitative Analysis Case Exercise

You are the new Marketing Manager for Toasty ovens for an appliance manufacturer. The current annual total market volume of ovens is 5 million units, and Toasty oven sells about 750,000 units per year.

The previous manager of Toasty ovens had collected the following data for planning the business in the coming year. Direct factory labor = $13.20 per unit Raw materials = 10% of Manufactures Selling Price Salesperson's Commissions = 20% of Manufacturer Selling Price Factory & administrative overheads = $2,000,000 Retail selling price = $300 per unit Retailers margin = 20% Wholesaler's margin = 20% Distributor’s margin = 15% Sales force travel expenses = $800,000 Advertising = $3 million Product Liability Insurance = $100,000

Questions 1. What is the contribution per unit for the Toasty ovens? Answer ____________________

2. What is the break even volume for Toasty in units and in dollars? Answer ___________________

3. What market share does the Toasty brand need to break even? Answer _______________

4. What is the current total contribution? Answer ________________________________

5. What is the profit impact for Toasty? Answer ___________________________

6. How many units does Toasty need to sell to achieve to have a profit impact of $100 million? Answer ___________________________

ANSWER KEY1. What is the contribution per unit for the Toasty ovens? Answer ____________________Manufacturer Price = $300 * (1-20%) * (1-20%) * (1-15%) = $163.20

Variable CostDirect factory labor = $13.20 per unitRaw materials = $163.20 * 10% = $16.32 per unitSales Commission = $163.20 * 20% = $32.64

= $62.16

Unit Contribution = Selling Price – Variable CostSelling Price = $163.20

= $163.20 - $62.16 = $101.04

2. What is the break even volume for Toasty in units and in dollars? Answer ___________________Fixed Cost Factory/Admin overhead = $2,000,000Sales force travel expenses = $800,000Advertising = $3,000,000Product Liability Insurance = $100,000

= $5,900,000

Breakeven Volume = Fixed Cost / Unit Contribution = $5,900,000 / $101.04 = 58,392.72 units

3. What market share does the Toasty brand need to break even? Answer _______________

BEV Market Share = BEV / Total Market Units = 58,392.72 / 5,000,000 = 1.17% 4. What is the current total contribution? Answer ________________________________Total Contribution = Unit Contribution * Total Units = $101.04 * 750,000 = $75,780,000 5. What is the profit impact for Toasty? Answer ___________________________Profit Impact = Total Contribution – Fixed Costs = $75,800,000 - $5,900,000 = $69,880,000

6. How many units does Toasty need to sell to achieve to have a profit impact of $100 million? Answer ___________________________Profit Impact = (Units * Unit Contribution) – Fixed Cost$100,000,000 = (Units * $101.04) - $5,900,000Units = ($100,000,000 + $5,900,000) / $101.04 = 1,048,099.76 units