Case $5$ FND The Hill Channel Partners. Due Saturday, August $13$

Instructions:

a$.$ Read case

b$.$ Use the Excel File $$ Case $5$ Tables for calculations

c$.$ Address the following questions:

Summary:

FND Hill has two options to enter the small business market $$ through a partnership or through direct sales. The costs and pricing differs for each approach.

Hill Partnership:

$-$ Sales price is $35\%$ lower

$-$ Hill would sell and service the products

$-$ FND is considering paying commissions to their own sales force

Direct Sales

$-$ Sales are expected to be $25\%$ of possible sales through the partnership

$-$ Service and sales support costs would be incurred

$1.$ Determine the unit contribution margin for the RX$-10$ model and for the RX$-50$ model under the direct$-$sales approach.

$2.$ Determine the unit contribution margin for each of the two product models selling through the potential Hill partnership channel. Prepare your analysis including and excluding commissions.

$3.$ The Hill partnership has estimated low sales volume of $2,500$ and estimated high volume of $5,000$ units. The estimated direct sales volume would be $25\%$ of the Hill partnership. Using your calculations from Questions $1$ and $2,$ above, prepare an analysis of incremental Total Contribution Margin $($TCM$)$ for sales through the Hill channel for four scenarios:

a$.$ If all Hill sold was RX$-10$s in a volume of $2,500$ units per year.

b$.$ If all Hill sold was RX$-50$s in a volume of $2,500$ units per year.

c$.$ If all Hill sold was RX$-10$s in a volume of $5,000$ units per year.

d$.$ If all Hill sold was RX$-50$s in a volume of $5,000$ units per year.

$($Those four possibilities should provide good estimates of the minimum and maximum TCM effects of the proposed partnership arrangement.$)$ Note that the case estimates direct sales at $25\%$ of those sales possible through Hill. In your comparison, use $25\%$ of the Low & High estimates for the comparable direct sales.

$4.$ Identify the categories of potential differential fixed costs that might arise in pursuing either the direct$-$sales initiative or the Hill channel partnership. Which are relevant to your recommendation and which are not? $($Hint: use the activity based hours and costs for service and sales support, if applicable$)$

$5.$ Provide an assessment of the role that the sales commission data plays in your overall recommendation analysis. What role should it play, and why?

$6.$ Provide an assessment of the threats associated with partnering with Hill. How does this figure into the decision? Why?

Hints:

Warranty parts costs $($service rate x parts$)$ are considered a variable cost and are applicable in both sales approaches. Sales and service costs are potential incremental fixed costs.

Table $1.$ Basic Information About Herald Products

RX$-10$ RX$-50$

Position in product line Entry$-$level Top end

Average selling price $$18,000$ $$150,000$

Variable manufacturing costs$/$unit $$9,000$ $$63,000$

Variable unit installation cost $$900$ $$1,400$

Sales commission rate $5\%5\%$

Note: All monetary values are expressed in U$.$S$.$ dollars.

Table $2.$ Comparative ABC Warranty Service Costs per Average Service Call

Fully Loaded ABC Rate Per Productive Hour$*$ ABC Driver Count Product Profiles

RX$-10$ RX$-50$

Service labor type$/$class

Remote $($call center$)$ level $1$ $$300\mathrm{.}4$ hours $0\mathrm{.}7$ hours

Remote $($phone$)$ level $2$ $$850\mathrm{.}3$ hours $0\mathrm{.}8$ hours

Field technician $$1303\mathrm{.}9$ hours $6\mathrm{.}1$ hours

Parts $$300$ $$500$

Historical service call rate during Warranty $1\%3\%$

$*$ Fully loaded costs include salaries or wages plus benefits, employment costs, and the costs of associated dedicated tools and assets for that employee. Productive hours are the hours spent performing the job the employee was hired to do$.$

Table $3$: ABC Sales Profile Data Average per Successful Sales Event

Fully Loaded ABC Rate Per Productive Hour$*$ ABC Driver Count Product Profiles

RX$-10$ RX$-50$

Service labor

Lead salesperson $$1258\mathrm{.}0$ hours $24\mathrm{.}0$ hours

Sales support staff $$735\mathrm{.}0$ hours $17\mathrm{.}0$ hours

$*$Fully loaded costs include salaries or wages plus benefits, employment costs, and the costs of associated dedicated tools and assets for that employee. Productive hours are the hours spent performing the job the employee was hired to do$.$ On an annual basis, they are paid hours less holidays, vacation, sick time, training, and administrative compliance hours. For sales, the time consumed pursuing $$dead end$$ leads is included in the successful event averages