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FINANCIAL ASSIGNMENT Marketing 453 Winter 2016 (W 6:30 PM) (for Wednesday, 1/27/16) (I) You have just been appointed the product manager of the "Smootho" electric shavers in a large consumer products company. As part of your new job, you want to develop an understanding of the financial situation for your product. Your brand assistant has provided you with the following facts: a. Retail selling price b. Retailer's margin c. Jobber's margin d. Wholesaler's margin1 e. Direct factory labor f. Raw materials g. All factory and administrative overheads h. Salesperson's commissions i. Sales force travel costs j. Advertising k. Total market for electric shavers l. Current yearly sales of "Smootho" $60 per unit 20% 15% 18% $2 per unit $1 per unit $2 per unit (if unit volume = 100,000) 10% of manufacturer's selling price $215,000 $900,000 1 million units 190,000 units Questions 1. 2. 3. 4. 5. 6. What is the contribution per unit for the "Smootho" brand?2 What is the break-even-volume in units and in dollars? What market share does the Smootho brand need to break even? What is the current total contribution? What is the current before-tax profit of the Smootho brand? What market share must Smootho obtain to contribute a before tax profit of exactly $4.5 million? (II) One of the first decisions you have to make as the brand manager for Smootho is whether or not to add a new line of electric shavers, the "Super-Smootho line. The line would be marketed in addition to the original Smootho line. Your brand assistant has provided you with the following facts. 1 The wholesaler sells to the jobber who, in turn, sells to the retailer. 2 You are a part of the company that manufactures Smootho. Hence, you have to view this problem from the perspective of the manufacturer of the product (and not from that of the middlemen). a. b. c. d. e. Retail selling price All margins the same as before Direct factory labor Raw materials Additional factory and admin. overheads $80 per unit $3 per unit $6 per unit $3.6 per unit (if unit volume = 50,000) f. Salesperson's commissions: the same percent as before g. Incremental sales force travel cost $60,000 h. Advertising for Super Smootho $650,000 i. New equipment needed $950,000 (to be depreciated over 10 years) j. Research and development spent $210,000 up to now k. Research and development to be $600,000 (to be amortized over 5 years) spent this year to commercialize the product Questions 1. What is the contribution per unit of the Super-Smootho brand? 2. What is the break-even volume in units and in dollars? 3. What is the sales volume in units necessary for Super Smootho to yield in the first year, a 20 percent return on the equipment to be invested in the project? (III) The $80 selling price for Super Smootho seems high to you. You thought you might lower the price to $70 per unit and raise retail margin to 30 percent. Question What is the break-even volume in units? 2