489 Marketing A. LeBard

EXERCISE ELEVEN C KP

Buffington Wholesale A

Assignment - Read the Buffington Wholesale case and answer the following questions.

The Buffington Wholesale Company (BWC) is an industrial distributor of builders' hardware. Major items in the line include hinges, bolts, electrical fixtures, locks, and specialty fasteners. Sales and profits at the end of the fiscal year are reflected in the following profit and loss statement:

Sales

$

10,000.000

Cost of goods sold

8,000,000

Gross margin

2,000,000

Variable costs

500,000

Fixed costs

1,200,000

Total non C of G costs

1,700,000

Profit (before taxes) NR

$

300,000

O

BWC sales are made to several hundred dealer-outlets through a four person outside sales force and a small , two person marketing department, which annually sells approximately $1,000,000 of product direct to a handful of important builders. A three person inbound telemarketing staff handles telephone, internet and drop-in business. Even though the outside sales team is responsible for some 250 customers, it is estimated that two-thirds of the actual "outside sales" volume is placed by telephone, internet, or on a pickup basis rather than during an outside sales call. Competition is severe, since twenty local competitors and the branch offices of two large national manufacturers serve essentially the same market.

The risk of generalizing aside, the BWC financial manger estimates that costs of goods sold are virtually all variable in nature. Thus, BWC has a variable cost percentage of eighty-five percent ($8,000,000 + $500,000 / $10,000,000). The cost relationships are estimated to hold within a sales range of $5,000,000 to $40,000,000.

As a general rule, BWC is unwilling to make an investment in either fixed or working capital unless a return on investment (ROI) of 20% or higher is anticipated. * BWC's president asked the marketing department staff to respond to four questions.

1. At what dollar level would BWC breakeven if a normal return of $400,000 is required?

$

1. What sales amount would a new salesperson have to produce if the annual incremental costs (salary, expenses
2. and other traceable costs) were $30,000 and the firm wanted to realize a 20% ROI?

$

1. Suppose the BWC preferred to make a return on sales (ROS) of 5% rather than the 20% ROI, what sales
2. amount would the new salesperson have to produce?

$

1. What total BWC sales would be required to produce a $300,000 return (e.g., before tax profit) assuming a 10%
2. cut in the selling prices?