Chipman Union Case Analysis

CU Potential Sales & Profits from Oder-Eater Hosiery | | | Display Boxes | 15000 | Case Size (packages) | 24 | Total Potential Package Sales | 360000 | Average Sale price/package | $6.00 | Average Gross Profit/package | $1.30 | Inventory Turnover Times Annually | 2.54 | Potential Sales/year | $5,486,400.00 | Sales through food & drugstores (75% of potential sales) | $4,114,800.00 | Potential Profit from sales/year | $1,188,720.00 | Expenses over the first 3 years | | | | | | | | Non-Promotional | | | | | Year 1 | Year 2 | Year 3 | Advertising for 25% unaided awareness in the US | $1,000,000 | | | 3 salespeople/year | $210,000 | $210,000 | $210,000 | Display Boxes | $1,500,000 | | | Consulting | $100,000 | | | Combe License (1st year) | $60,000 | | | Combe Royalty = 5% of 2nd year sales | | $274,320.00 | $274,320.00 | Commission to brokers (=5% of sales through food & drugstores) | $205,740.00 | $205,740.00 | $205,740.00 | | | | | Promotional Expenses | | | | | | | | Cash Refund Offer | $75,000 | $75,000 | $75,000 | 25-cent Coupon | $136,500 | $136,500 | $136,500 | Off-invoice allowance for food & drugstores | $822,960.00 | $822,960.00 | $822,960.00 | Advertising allowance of 5% for 55% of sales | $150,876.00 | $150,876.00 | $150,876.00 | | | | | Total Expenses | $4,261,076 | $1,875,396 | $1,875,396 | From the above calculations, we observe that if CU gives out all the suggested promotions (discounts and allowances), the total expenses exceed the potential gross profits/year (Note: Instead of netting the promotions from the sales, they are equivalently treated as expenses). This would not allow the firm to break even. Removing the off-invoice allowance brings the expenses below the gross profits (except for year