1. Danielle Levesque is preparing a new product analysis for a product she has code-named Panther. Based on her market research she has discovered retailers customarily expect a 40% markup and wholesalers, a 20% markup. Danielle is counting on a 31% margin for the product. Panther's variable costs are $31.50 per unit and estimated total incremental fixed costs are $80,000. At an anticipated sales volume of 5000 units, will Danielle's Panther make a profit? What will be the total contribution to retailers?
2. A sales representative for a local electronics store makes a 25% commission on contribution margin per item. He is dealing with a customer on a computer system which will retail for $1199. The store margin on computers is typically 8%. A customer interrupts him to buy a small flat screen TV with a wholesale cost of $650. The store typically makes a 25% margin on these TVs. What should he do?
3. Bob Allison imports roses from California for direct distribution to customers in Ottawa. Five sales people sell the roses to shoppers in malls on Thursdays, Fridays, and Saturdays and receive 10% of the $2 selling price. Each rose costs $0.35 from the supplier. Air freight costs $0.15 a rose, while customs duty costs $0.15 a rose. Provincial tax laws require that 7% of the selling price be remitted to the government. Mr. Allison absorbs this cost rather than passing it on to his customers. Fifteen percent of the roses received are damaged and thus cannot be sold. Other expenses include $325 for the sales manager's weekly salary, $500 a week for promotion (newspaper ads and posters) and $100 a week for gas and maintenance on the company car. The automobile has just been purchased for $9360 and it is expected to last three years. For accounting purposes, Mr. Allison uses the straight-line depreciation method. Mr. Allison, who earns $30 000 a year, spends 20% of his time with the rose project and he allocates this cost accordingly to that project. He hopes the company can earn $1000 a week before tax. He wonders how many roses he must sell to break even, how many to make the $1000 profit, and how many to order if he expects to sell at that profit target level. (Use a 52 week year.)
4. Bill Earner is unhappy about his latest sales results: his total dollar sales of products A and B have increased but his gross profit percentage has declined over the previous year. He wonders whether it is time to drop product B whose volume has declined to 2000 units versus the 10000 units sold of product A. Bill's total sales for the year were $400 000, his total cost of goods sold was $325 000 and his total overhead $50 000. Product B was Bill's first product and sold last year at $75 per unit (at factory). Bill calculated that it cost him $100 000 in materials and labour to produce B last year and he allocated $22.50 per unit towards his general overhead. product A has been on the market for the past two years and cost Bill $10 per unit in materials and $12.50 per unit in labour to produce. Product A is made in a similar fashion to Product B so Bill has been able to produce it with only an additional $25000 investment in new equipment (estimated life - five years). Since this investment was to be depreciated on a straight-line basis, Bill decided to have Product A bear this additional annual company overhead. No other overhead was charged to A. Should Bill drop B? Why?