Luxor Case Answers

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Case question 1
Variable manufacturing costs as a percentage of sales and the markup on variable manufacturing cost to establish the selling prices for each of the three product lines in 2008 en 2010:

Compared markup 2008 and 2010:

The markup is lower in 2010 because Luxor lowered the selling prices for lipstick in 2009 and for nail polish in 2010. They had to do this because the discount chains continued to put pressure on them to reduce the prices for lipstick and nail polish.

Case question 2

The calculation that converts the Wholesale selling price of the 12/31/2008 lipstick inventory shown as $11.5 million to the “cost” of $9.7 million:

Case question 3

Assuming the variable manufacturing cost per unit stayed the same in 2009 and 2010, did the sales volume of nail polish (in terms of physical units) increase or decrease after the selling price was reduced in 2010? Explain.

Conclusion:
The variable manufacturing costs per unit stayed the same over 2009 and 2010. The actual variable manufacturing costs increased, so it’s clear that the firm has sold more units.

Case question 4

The calculation of the breakeven revenue in 2011:

The contribution margin % is calculated by multiplying the sales mix with the contribution margin.

Case question 5
Susan’s proposed budget for 2011 includes a substantial repayment of the bank loan. If the repayment occurs, is the firm likely to break even in 2012? Explain.

The loan figures of the company have been stable for the last two years. If the company repays $10 million of the loan with an interest rate of 7%, the firm will save $ 700K a year. If you decrease the fixed costs with 700K, you can calculate the new breakeven revenue:

Therefore, it is unlikely that the firm will sell more in 2012. The sales will probably decrease. Our advice is to focus marketing & promotion on the product with the highest contribution margin.

Case question 6
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