Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Given the above information in Q1. Shannon's wants to increase its sales to retailers by 20% in the next year. Management estimates that the incremental

image text in transcribed
image text in transcribed
image text in transcribed
Given the above information in Q1. Shannon's wants to increase its sales to retailers by 20% in the next year. Management estimates that the incremental promotion program required to generate sufficient demand to boost sales by 20% will be: $ Personal Selling Costs Consumer Advertising 60,000 (exclusive of commission) 63,284 $ Trade Promotion $ 40.269 Sales Promotion $ 25,000 Shannon's will need to hire an additional salesperson (paid a salary and commission and provide some added administrative support. The sales person's salary plus administrative support will cost about $60.000 per year. The sales person's commission will be the equivalent of $0.05 per six pack sold. The incremental costs of consumer advertising, trade promotion, and sales promotion necessary to support sales in the new market will be substantial as indicated in the table above. How many six-packs must be sold to break even on the incremental costs that are anticipated? An additional powerful derivative of break-even analysis involves its use to determine the likely profitability of making changes to aspects of the Firm's marketing mix. Adding or modifying advertising and other promotion programs, distribution channel modifications, product modifications, and changes in sales personnel can be costly and incremental break-even analysis can provide insights into the potential profitability of these changes. An example illustrates the power of incremental analysis Let's revisit our Pampered Puppy example developed in an earlier exercise. Norton Pet Foods (NPF), the producer of the Pampered Puppy brand of high quality organic canned dog food is interested in penetrating the Dallas-Fort Worth (DFW) market. The producer currently sells the Pampered Puppy brand in other similar markets and possesses, on average, a market share of five percent (5%) of the premium canned organic dog food markets in these areas. Pampered Puppy will be sold through specialty pet food stores and supermarkets in the DFW market area. Sales will be handled by a dog food broker who will be paid a commission of 6% on sales to retailers. Pampered Puppy will be sold in standard 12 ounce cans with a recommended selling price to consumers of $2.40 per can for $.20 per ounce). Retailers demand a 40% markup resulting in a selling price to retailers of $2.40 - $.48 - $1,44 per 12oz can or $1.44 x 24 - $34.56 per case of 24. Subtracting the broker's 6% yields revenue to NPF of $32.49 per case of dog food sold, Norton Pet Foods anticipates that variable costs of production for Pampered Puppy will be 5.96 per 12oz can, or $23.04 per case. The contribution per cases, therefore, 532.49 - $23.00 - $9.45, or $9.45 $32.04 - 2908 or 29.08% Management also estimates that the incremental marketing and distribution costs associated with expanding to the DFW market area will be $15.000 per year. These costs will include advertising in local media, slotting fees for retailers, and point of sale materials such as brochures. The resulting incremental break-even in cases of dog food sold is: $15,000 67 BE(Cases) 1,588 Cases $9.45 From an earlier Keeping Score exercise, we know that the market potential for premium organic dog food in the DFW area is about 65.000 cases for all producers of this type of dog food. Thus, NPF will need to grab 1.588.65,000 - 0244 or 2.44% market share to cover the incremental expenditures estimated for the expanded distribution program into the DFW area Since NPF boasts a 5% market share in other market areas similar to the DFW market management feels that it is quite reasonable that Pampered Puppy can command at least the needed 2.4% market share needed to break-even. It would be a different story is Pampered Puppy veres only, let's say. 1.5% market share in markets it currently serves. Management might not be quite so willing to take the plunce since more market share is needed to just break-even than the 1,5% share it can reasonably expect to achieve Shannon's distributes its beer through a wholesaler, Miller of Denton. The retail selling price for a six- pack of its typical craft beer is $12.00. The retailer's cost per six-pack is $8.00. The wholesaler sells the beer to the retailer for this price. Shannon's sells a six-pack to the wholesaler for $5.40. Shannon's variable costs of production packaging, and distribution are $3,60 per six-pack. Shannon's has the following annual fixed operating and marketing costs: Given the above information in Q1. Shannon's wants to increase its sales to retailers by 20% in the next year. Management estimates that the incremental promotion program required to generate sufficient demand to boost sales by 20% will be: $ Personal Selling Costs Consumer Advertising 60,000 (exclusive of commission) 63,284 $ Trade Promotion $ 40.269 Sales Promotion $ 25,000 Shannon's will need to hire an additional salesperson (paid a salary and commission and provide some added administrative support. The sales person's salary plus administrative support will cost about $60.000 per year. The sales person's commission will be the equivalent of $0.05 per six pack sold. The incremental costs of consumer advertising, trade promotion, and sales promotion necessary to support sales in the new market will be substantial as indicated in the table above. How many six-packs must be sold to break even on the incremental costs that are anticipated? An additional powerful derivative of break-even analysis involves its use to determine the likely profitability of making changes to aspects of the Firm's marketing mix. Adding or modifying advertising and other promotion programs, distribution channel modifications, product modifications, and changes in sales personnel can be costly and incremental break-even analysis can provide insights into the potential profitability of these changes. An example illustrates the power of incremental analysis Let's revisit our Pampered Puppy example developed in an earlier exercise. Norton Pet Foods (NPF), the producer of the Pampered Puppy brand of high quality organic canned dog food is interested in penetrating the Dallas-Fort Worth (DFW) market. The producer currently sells the Pampered Puppy brand in other similar markets and possesses, on average, a market share of five percent (5%) of the premium canned organic dog food markets in these areas. Pampered Puppy will be sold through specialty pet food stores and supermarkets in the DFW market area. Sales will be handled by a dog food broker who will be paid a commission of 6% on sales to retailers. Pampered Puppy will be sold in standard 12 ounce cans with a recommended selling price to consumers of $2.40 per can for $.20 per ounce). Retailers demand a 40% markup resulting in a selling price to retailers of $2.40 - $.48 - $1,44 per 12oz can or $1.44 x 24 - $34.56 per case of 24. Subtracting the broker's 6% yields revenue to NPF of $32.49 per case of dog food sold, Norton Pet Foods anticipates that variable costs of production for Pampered Puppy will be 5.96 per 12oz can, or $23.04 per case. The contribution per cases, therefore, 532.49 - $23.00 - $9.45, or $9.45 $32.04 - 2908 or 29.08% Management also estimates that the incremental marketing and distribution costs associated with expanding to the DFW market area will be $15.000 per year. These costs will include advertising in local media, slotting fees for retailers, and point of sale materials such as brochures. The resulting incremental break-even in cases of dog food sold is: $15,000 67 BE(Cases) 1,588 Cases $9.45 From an earlier Keeping Score exercise, we know that the market potential for premium organic dog food in the DFW area is about 65.000 cases for all producers of this type of dog food. Thus, NPF will need to grab 1.588.65,000 - 0244 or 2.44% market share to cover the incremental expenditures estimated for the expanded distribution program into the DFW area Since NPF boasts a 5% market share in other market areas similar to the DFW market management feels that it is quite reasonable that Pampered Puppy can command at least the needed 2.4% market share needed to break-even. It would be a different story is Pampered Puppy veres only, let's say. 1.5% market share in markets it currently serves. Management might not be quite so willing to take the plunce since more market share is needed to just break-even than the 1,5% share it can reasonably expect to achieve Shannon's distributes its beer through a wholesaler, Miller of Denton. The retail selling price for a six- pack of its typical craft beer is $12.00. The retailer's cost per six-pack is $8.00. The wholesaler sells the beer to the retailer for this price. Shannon's sells a six-pack to the wholesaler for $5.40. Shannon's variable costs of production packaging, and distribution are $3,60 per six-pack. Shannon's has the following annual fixed operating and marketing costs

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Advanced Accounting

Authors: Susan S. Hamlen

4th Edition

1618532618, 9781618532619

More Books

Students also viewed these Accounting questions

Question

Is the sequence of the material logical? Convincing?

Answered: 1 week ago