This case study is prepared to practice how to apply what you have learned in the classroom to real marketing situations. Read the following marketing situation and discuss with students in your neighborhood to prepare your answers to the questions. Submit your WORD answer file individually to the dropbox for this case study by due date and time. If you do not submit your answers, you will not achieve your participation score.

Part I: Calculating Break-Even Point (BEP)

Your Mission. When launching any new product, it is necessary to calculate its break-even point (BEP) which refers to a point where total revenue is equal to total cost as a combination of fixed costs and variable costs, resulting in the company profit zero. Using the break-even analysis, marketers can understand at least how many units of an item should be sold in order not to experience the negative profit or loss from the accounting perspective. Given this background, the first part of this case study allows students to learn how to calculate the break-even point using various accounting information.

To figure out how many units of an item Purduetech needs to be sold, calculate the break-even point (BEP) of manufacturing company using the given accounting information. For this matter, follow the following steps:

Step 1. Read the following statement and show a series of steps to derive the final equation for the break-even point Q* from the profit equation, as discussed in the classroom.

When attempting to determine the final unit selling price of an item, marketers need to calculate its break-even point (BEP) which refers to the level of an output making the company profit zero, as a point where total revenue is equal to total cost. Using the break-even analysis, marketers are able to know at least how many units of an item should be sold in order not to experience negative profit or loss from the accounting perspective. The BEP is illustrated in the following picture as shown below.

Profit maximization equation:

Profit=Total Revenue-Total Cost

Break-Even Point Q*:

BEP=Q*=FCUSP-UVC=FCMargin (or Unit Contribution)

Step 2. Read the following marketing situation and show your calculation steps when calculating the break-even point (BEP) of manufacturing company Purduetech. Use the following summary of numbers and show your steps of calculation.

Marketing Math Problem:

The Marketing Manager of manufacturing company Purduetech Inc. is planning to introduce a new PDA to the market. The PDA will be sold at retail stores at a price of $ 200.00 each. The retail stores require a margin 30%. The wholesaler requires a margin of $40.00 per unit. The PDA market is estimated to be 4,000,000 units per year. The variable manufacturing costs needed to produce a PDA is $55.00. The cost of the machinery needed to produce the PDA is $50,000,000 over ten years. The PDA is going to be sold together with software that costs $5 dollars per PDA produced. The manager plans to do a test market before launching the product that would cost $500,000. In order to help build a premium image for the PDA, the Marketing Manager is considering spending 3,400,000 on advertising. The Manager’s salary is $100,000 and the sales personnel of Purduetech Inc. receive a 10% commission on the selling price.

• Selling price of each PDA = $200.00
• Retail margin = 30%
• Wholesale margin = $40.00

• Total PDA market is 4,000,000 units per year
• Variable manufacturing costs = $55.00
• Machinery costs = $5,000,000 per year
• Software costs per PDA = $5.00
• Test market costs = $500,000
• Advertising costs = $3,400,000
• Manager’s salary = $100,000
• Sales personnel receive 10% commission

1. What unit sales are required for Purduetech Inc. to break even?
2. If the wholesalers demand a $50.00 margin, how many units of the PDA would Purduetech Inc. have to sell to break even?

Part II: Understanding Cost Structure of Information Goods

Your Mission. Read following mini case with respect to pricing strategies of information goods such as DVDs, CDs, various types of software, digital books, digital icons, and among others. Then, consider how it is possible to sell any DVDs at a very low price, as shown below. Answer following question.

Setting the Final Selling Price of Information Goods – Mrs. Doubtfire (DVD) 1993

(Image captured from the BestBuy.com website)

Robin Williams learns that keeping in touch with his children can be a drag in this hit comedy. Daniel Hillard (Williams) is an eccentric actor who specializes in dubbing voices for cartoon characters. Daniel is a kind man and a loving father, but he's a poor disciplinarian and a shaky role model. After throwing an elaborate and disastrous birthday party for his son, Daniel's wife Miranda (Sally Field) reaches the end of her patience and files for divorce. Daniel is heartbroken when Miranda is given custody of the children, and he's only allowed to visit them once a week. Determined to stay in contact with his kids, Daniel learns that Miranda is looking for a housekeeper, and with help from his brother Frank (Harvey Fierstein), a makeup artist, Daniel gets the job disguised as Mrs. Iphegenia Doubtfire, a stern but caring Scottish nanny. Daniel pulls off the ruse so well that neither his ex-wife nor his children recognize him, and in the process, he learns how to be the good parent he should have been all along. However, Daniel also has to deal with the little matter of Miranda's new boyfriend, Stu (Pierce Brosnan). ~ Mark Deming, Rovi

1. When you visit BestBuy website, you may find current retail price of Mrs. Doubtfire movie DVD is $3.99. Discuss how this low retail selling price is possible after considering unique cost structure of information goods in the context of break-even point (BEP) framework above.