(I) You have just been appointed the product manager of the "FIFO" electric blankets 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 $40 per unit

b. Retailer's margin 25%

c. Jobber's margin 12%

d. Wholesaler's margin[1] 20%

e. Direct factory labor $2 per unit

f. Raw materials $1 per unit

g. All factory and administrative overheads $2.7 per unit (if unit volume = 100,000)

h. Salesperson's commissions 10% of manufacturer's selling price

i. Sales force travel costs $232,000

j. Advertising $800,000

k. Total market for electric blankets 1 million units

l. Current yearly sales of "FIFO" 210,000 units

Questions

1. What is the contribution per unit for the "FIFO" brand?[2]

2. What is the break-even-volume in units and in dollars?

3. What market share does the FIFO brand need to break even?

4. What is the current total contribution?

5. What is the current before-tax profit of the FIFO brand?

6. What market share must FIFO obtain to contribute a before tax profit of exactly $6 million?

[1] The wholesaler sells to the jobber who, in turn, sells to the retailer.

[2] You are a part of the company that manufactures FIFO. Hence, you have to view this problem from the perspective of the manufacturer of the product (and not from that of the middlemen).

following facts.

a. Retail selling price $60 per unit

b. All margins the same as before

c. Direct factory labor $3 per unit

d. Raw materials $5 per unit

e. Additional factory and admin. overheads $3.5 per unit

(if unit volume = 50,000)

f. Salesperson's commissions: the same percent as before

g. Incremental sales force travel cost $68,000

h. Advertising for Super FIFO $600,000

i. New equipment needed $800,000 (to be depreciated over 10 years)

j. Research and development spent $200,000

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-FIFO brand?

2. What is the break-even volume in units and in dollars?

3. What is the sales volume in units necessary for Super FIFO to yield in the first year, a 25 percent return on the equipment to be invested in the project?

(III) The $60 selling price for Super FIFO seems high to you. You thought you might lower the price to $50 per unit and raise retail margin to 30 percent.

Question

What is the break-even volume in units?