Solution of Strategic Marketing Problems Chapter 2

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MKT 2375

Chapter 2 Problem 1 a. CD Contribution Profit
Selling Price to CD Distributor
Less: Variable Cost

$9.00 $1.25 $0.35 $1.00 $2.60

CD Package and disk Songwriter’s royalties Recording artists’ royalties Total Variable Cost

Contribution per CD unit

$6.40

Chapter 2 Problem 1 b. Break-Even Analysis – Units and Dollars Total Fixed Cost

Advertising and Promotion $275,000 Studio Recording’s Overhead $250,000 Total Fixed Cost $525,000

BEVU = $525,000 / $6.40 = 82,031.25 units
BEV $ = 82,031.25 units x $9.00 = $738,281.25

Chapter 2 Problem 1 CONTRIBUTION MARGIN
Total Fixed Cost

Advertising and Promotion $275,000 Studio Recording’s Overhead $250,000 Total Fixed Cost $525,000 BEV$ = $525,000 / 0.711 =

CD Selling Price = $9.00 Contribution Profit = $6.40

$738,396.62
Versus $738,281.25

Contribution Margin = $6.40 / $9.00 = .711 of 71.1%

Difference Due To Rounding of Contribution Margin

Chapter 2 Problem 1 c. Calculate the net profit if 1 million CDs are sold Total Sales (1M CDs x $9) Less: Tot Variable Costs (1M x $2.60) Less: Total Fixed Cost $9,000,000 $2,600,000 $ 525,000 Net Profit $5,875,000

Chapter 2 Problem 1 d. CD unit volume to achieve a $200,000 profit Profit Objective Fixed Cost Contribution per Unit $200,000 $525,000 $6.40

$525,000 Fixed Cost + $200,000 Profit Objective $6.40 Contribution per Unit

= 113,281.25 units

CHAPTER 2 Problem 2

a. VCI’s Contribution and Contribution Margin Selling Price for VCI Less: Retailer Margin $20.00 $-8.00 Suggested Retail Price Retailer Margin (40% of suggested retail price)

VCI Selling Price
Variable Cost Per Unit
1. 2. 3. Copy Reproduction ($4,000/1000) = $4.00 Label & Package Mgr. ($500/1000) = $0.50 Royalties ($500/1000) = $0.50

$12.00

Contribution Profit & Margin Contribution Profit = $12.00 - $5.00 = $7.00 per unit Contribution Margin = $7.00 / $12.00 = 0.583

Total Variable Cost =

$5.00

or 58.3%

1. Contribution Profit = $7.00 Per Unit 2. Contribution Margin = 58.3%

CHAPTER 2 Problem 2

b. Breakeven Point In Units and Dollars
FIXED COSTS Distribution rights for film Label Design Advertising Package Design Total Fixed Costs $125,000 $ 5,000 $ 35,000 $ 10,000 $175,000

BEVU = $175,000 / $7.00 = 25,000 units BEV$ = $175,000 / 0.583 = $300,172

1. $150,000 Investment 2. $175,000 Fixed Cost 3. Contribution Profit = $7.00

CHAPTER 2 Problem 2

c. Market Share to Achieve 20% ROI First Year 20% Return First Year Fixed Cost + ROI Units Required Market Share Required

$150,000 x 0.20 = $30,000 $175,000 + $30,000 = $205,000 $205,000 / $7.00 = 29,286 units 29,286 / 100,000 = 29.3%

CHAPTER 2 Problem 3
a. Increase in Unit & Dollar Sales to Recoup Advertising Increase

Rash Away
Contribution Margin = ($2.00 - $1.40) / $2.00 = 30% Absolute Increase in Unit Sales $150,000 / $0.60 = 250,000 Units Absolute Increase in Dollar Sales $150,000 / 0.30 = $500,000

Red Away
Contribution Margin = ($1.00 - $0.25) / $1.00 = 75% Absolute Increase in Unit Sales $150,000 / $0.75 = 200,000 Units Absolute Increase in Dollar Sales $150,000 / 0.75 = $200,000

CHAPTER 2 Problem 3
b. Revenue to Cover each $1.00 of Incremental Advertising

Rash Away
$1.00 Incremental Advertising / 30% Contribution Margin = $3.33

Sales………………………….. $3.33 Variable Costs (70%)……….. $2.33 Contribution Margin (30%)… $1.00 Incremental Fixed Cost........ $1.00 Profit………………………….. $0.00

Red Away
$1.00 Incremental Advertising / 75% Contribution Margin = $1.33

Sales…………………………... $1.33 Variable Costs (25%)……….. $0.33 Contribution Margin (75%)... $1.00 Incremental Fixed Cost……. $1.00 Profit……………………..……. $0.00

CHAPTER 2 Problem 3
c. Revenue to Cover Current Contribution Profit Give 10% Price Drop RASH AWAY
1. Current Contribution Dollars = 1,000,000 units x $0.60 = $600,000 2. New Price with 10% Price Reduction= $1.80 Unit Price $1.40 Unit Variable Cost $0.40 Unit Contribution or 22.22% CM 3. $0.40 (x) =...
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