Aizan opened a small business a year ago manufacturing customized golf walking bags. The bags, which are used to hold golf clubs, are manufactured with durable high-end fabrics and choice of custom designs, targeted at the golfer who appreciates both style and function. Aizan invested $100,000 of his savings to start his business with a goal of earning a 15 percent return-on-investment. Unfortunately, after the first year of business, Aizan fell short of his goal, achieving only a 13 percent return-on-investment. To attract additional investors to and expand his business in the future Aizan knows he must be able to provide a 15 percent return-on-investment.

Over the past year, Aizan conducted a great deal of marketing research to collect data on consumer price sensitivity, demand, and response to marketing activities for his target market. Using his understanding of return-on-investment pricing and research findings, he constructed a simple spreadsheet to project operating statements for the upcoming year.

Aizan is evaluating four potential marketing mixes for next year, each with its own strength and weakness. Although manufacturing costs are expected to increase by 20 percent next year, Aizan negotiated a price break from his supplier that reduces this increase to 10 percent if his volume reaches 5500 units. Aizan discovered that he could charge the highest price for his product if he used magazine advertising to reposition his product as a luxury good, but that consumer demand increased more with direct mail, free 30-day trial offers, or social media campaigns. However, each of those strategies was only effective at a price point lower than $100.

The goal of this activity is to understand how target return-on-investment pricing can be calculated using an operating statement. Keep in mind that:

Return on investment = Net profit after taxes/Investment.

Use the formulas above and the spreadsheet below to help answer the questions that follow. The spreadsheet fields highlighted in yellow can be changed in order to determine possible outcomes. You can find the initial values in the corresponding blue cells in columns G to J. Start by entering the initial values into columns B to E. Then review the questions below and adjust the values in columns B to E to determine the correct answers.

1. Based on the data provided in the marketing dashboard, which marketing mix should Aizan move forward with in year 2? Projection 1Magazine advertising Projection 2Direct mail with $5 coupon Projection 3Free 30-day trial Initial yearNo marketing Projection 4Social media ?

2. Aizan decides to be more conservative with Projection 3 and adjusts the increase in quantity sold to 5 percent from 10 percent. He knows this adjustment also causes the unit variable cost increase to rise to 20 percent from 10 percent. With the new assumptions, what price must Aizan charge to reach his 15 percent return-on-investment target? $91 $93 $95 $97 $99 ?

3. Aizan wants to position his product as high price, high quality golf bag and therefore wants to pursue Projection 1. Unfortunately, the cost of magazine advertising has risen to $55,000 for the year. If he holds the price to $100 and uniit variable costs remain at 20 percent, what must the Increase in Quantity Sold reach so that Aizan achieves his ROI? 5% 6% 12% 8% 10% ?

4. Aizan feels that he was too conservative with Projection 2 and now is confident that he can achieve a 10 percent increase in quantity sold if he decreases his price to $90. Given these new assumptions and potential impact on the change in unit variable cost, what is the maximum amount he can spend in marketing expense to achieve his target return on investment? $26,000 $24,000 $30,000 $28,000 $29,000 ?

5. Aizan recently hired a marketing intern from a local university who has agreed to work for free. The intern really wants Aizan to focus on social media to market his golf bags. If the price remains $85, how can Aizan reach his return-on-investment goals? Increase the increase in quantity sold to 18% Decrease the marketing expense to $5,000 Decrease the marketing expense to $10,000 Increase the increase in quantity sold to 20% Decrease the change in unit variable cost to 8% ?

B D E 1 Projection 1 Magazine Advertising Projection 2 Projection 3 Direct Mail with Free 30-Day $5 Coupon Trial Projection 4 Social Media F G H I J Initial Value Initial Value Initial Value Initial Value Initial Year Projection 1- Projection 2- Projection 3- Free 30-Day Projection 4- Magazine Direct Mail Trial Social Media $ 80 S 100 $ 95 $ 90 $ 85 2 5% 8% 10% 10% 4 5,000 5,000 5,000 5,000 5,000 5,250 5,400 5,500 5,500 5 Price (P) Increase in quantity sold Quantity sold (0) Change in unit variable cost (UVC) Unit variable cost Total fixed expenses Owner's salary 20% 20% 10% 10% 6 $ 55.0 $ 55.0 $ 55.0 $ 55.0 $ 55 S 66.0 66.0 $ 60.5 $ 60.5 $ $ 7 $ 55,000 $ 55,000 $ 55,000 $ 55,000 $ 50,000 $ 55,000 55,000 $ 55,000 $ 55,000 8 8 S 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 9 Marketing expense $ 48.000 $ 30.000 $ 24,000 $ 12.000 Investment $ 100,000 $ 100,000 10 $ 100,000 $ 100,000 11 50% 50% 50% 50% $ $ 513,000 $ 495.000 $ 12 467,500 State/federal tax rate Net sales Cost of goods sold Gross margin 525,000 346,500 13 $ $ $ 332,750 356,400 156,600 $ 332.750 $ 162.250 $ 178,500 $ $ 134,750 14 S Total expenses 15 $ 153,000 $ 135,000 100,000 $ 100,000 $ 100,000 $ 100.000 $100,000 $ 50% 50% 50% 50% 50% 0 $ 0 $ 0 $ 0 $400,000 $ 275,000 $ 275,000 $ 275,000 $ 275,000 $275,000 $ (275,000) $ (275,000) $ (275,000) $ (275,000) $125,000 $ 105,000 105,000 $ 105,000 $ 105,000 $100,000 $ (380,000) $ (380,000) $ (380,000) $ (380,000) $25,000 S (190,000) $ (190,000) $ (190,000) $ (190,000) $ 12,500 $ (190,000) $ (190,000) $ (190,000) $ (190,000) $ 12,500 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $100,000 $ (190)% (190)% (190)% (190)% 13% $ 129,000 $ 117,000 S 25,500 $ 16 21,600 $ 33,250 $ 17.750 Net profit before taxes Taxes $ 12.750 $ 10,800 $ 16,625 $ 8,875 17 Net pro S after taxes 12.750 S $ 16,625 18 $ 8,875 10,800 100,000 Investment $ 100,000 $ $ 100,000 $ 100,000 19 20 Return on investment 13% 11% 17% 9% 21