# Solution of Strategic Marketing Problems Chapter 2

Pages: 8 (1456 words) Published: January 20, 2011
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) =...