EXERCISE 1

Fred Flintstone has just become the product manager for Yabba Dabba Doo, a consumer packaged product with a retail price of $2.00. Retail margins on the product are 33%, while wholesalers take a 12% margin. Yabba and its direct competitors sell a total of 40 million units annually, and Yabba has 24% market share of this total. Variable manufacturing costs for Yabba are $0.09 per unit. Fixed manufacturing costs are $1,800,000. The advertising budget for Yabba is $1,000,000. The product managers salary and expenses total $70,000. Salespeople are paid entirely by a 10% commission. Shipping costs, breakage, insurance, and other miscellaneous costs are $0.04 per unit.

Upon reflection, Fred decides not to increase Yabba Dabba Doos advertising budget and keeps it at $1,000,000. Instead, he listens to his neighbor Barney and decides to give retailers an incentive to promote Yabba by raising their margins from 33% to 40%. The margin increase would be accomplished by lowering the price of the product to retailers. Wholesaler margins would remain at 12%

If retailer margins are raised to 40% next year, how many units will Yabba have to sell to break even?

A)How many units will Yabba have to sell next year in order for it to achieve the same profit that it did this year?

B)What will Yabbas market share have to be next year for its profit to be the same as this year?

C)What will Yabbas market share have to be for it to generate a profit of $700,000?