Financial Problems from K&P Text

Financial Problems from K&P Text - 48 CHAPTER 2...

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Unformatted text preview: 48 CHAPTER 2 FINANCIAL ASPECTS OF MARKETING MANAGEMENT EXHIBIT 2.4 Pro Forma Income Statement for the 12-Month Period Ended December 31, 2006 Sales $1,000,000 Cost of goods sold 500,000 Gross margin $500,000 Marketing expenses Sales expenses $170,000 Advertising expenses 90,000 Freight or delivery expenses 40,000 300,000 General and administrative expenses Administrative salaries $ 120,000 Depreciation on buildings and equipment 20,000 Interest expense 5,000 Property taxes and insurance 5,000 Other administrative expenses 5,000 1 55,000 Net profit before (income) tax $45,000 This chapter provides an overview of basic account ing and financial concepts. A word of caution is necessary, however. Financial analysis of EXERCISES CD package and disc (direct material and labor) $1.2 5/CD Songwriters’ royalties $0.35/ CD Recording artists’ royalties $1.00/CD Advertising and promotion $275,000 Studio Recordings, Inc’s overhead $250,000 Selling price to CD distributor $9.00 was gamma "rtzmmmwa mu at WWfiJWWWWEWWM/ , EXERCISES Calculate the following: a. Contribution per CD unit b. Break—even volume in CD units and dollars c. Net profit if 1 million CDs are sold (1. Necessary CD unit volume to achieve a $200,000 profit Video Concepts, Inc. (V CI) markets Video equipment and film through a vari- ' ety of retail outlets. Presently, VCI is faced with a decision as to Whether it should obtain the distribution rights to an unreleased film titled Touch of Orange. If this film is distributed by VCI directly to large retailers,VCl’s invest— ment in the project would be $150,000. VCI estimates the total market for the film to be 100,000 units. Other data available are as follows: Cost of distribution rights for film $125,000 Label design ‘ 5000 Package design 10,000 Advertising 3 5,000 Reproduction of copies (per 1,000) 4,000 Manufacture of labels and packaging (per 1,000) 500 Royalties (per 1,000) 500 VCI’s suggested retail price for the film is $20 per unit. The retailer’s margin is 40 percent. a. What is VCI’s unit contribution and contribution margin? b. What is the break-even point in units? In dollars? c. What share of the market would the film have to achieve to earn a 20 percent return on VCI’s investment the first year? The group product manager for ointments at American Therapeutic Corpora- tion was reviewing vaes for two products: Rash- Away and Red-Away. Both products were designed to reduce skin irritation, but Egg-Away was primarily a cosmetig_treatment whereas _Ra\sh—Away also included a compound that Chillinaf-fid-the rash. The price and promotion alternatives recommended for the two prod- ucts by their respective brand managers included the possibility of using addi- tional promotion or a price reduction to stimulate sales volume. A volume, price, and cost summary for the two products follows: Rash-Away Red-Away Unit price $2.00 $1.00 Unit variable costs 1.40 0.25 Unit contribution $0.60 $0.75 Unit volume 1,000,000 units 1,500,000 units Both brand managers included a recommendation to either re‘duggprice. by 10 percent or invest an incremental $150,000 in advertising. grab—’5 a. What absolute increase in unit sales and dollar sales will be necessary to recoup the incremental increase in advertising expenditures for Rash-Away? For Red-Away? b. HOW many additional sales dollars must be produced to cover each $1.00 of incremental advertising for Rash—Away? For Red-Away? c. What absolute increase in unit sales and dollar sales will be necessary to maintain the level of total contribution dollars if the price of each product is reduced by 10 percent? 50 CHAPTER 2 FINANCIAL ASPECTS OF MARKETING MANAGEMENT , 4. After spending $300,000 for research an d development, chemists at Diversi- fied Citrus Industries have develop ed a new breakfast drink. The drink, called Zap, will provide the consumer with twice the amount of vitamin C currently available in breakfast drinks. Zap will be packaged in an 8-ounce can and will be introduced to the breakfast drink market, which is estimated to be equiva- lent to 21 million 8-ounce cans nationally. One major management concern is the lack of funds available for market- ing. Accordingly, management has decided to use newspapers (rather than tel- evision) to promote Zap in the introductory year and distribute Zap in major metropolitan areas that account for 65 percent of US. breakfast drink volume. Newspaper advertising will carry a coupon that will entitle the consumer to receive $0.20 off the price of the first can purchased. The retailer will receive the regular margin and be reimbursed for redeemed coupons by Citrus Industries. Past experience indicates that for every five ca ing the introductory year, one coupon will be returned. The cost paper advertising campaign (excluding coupon returns) will b Other fixed overhead costs are expected to be $90,000 per year. _ ‘ Management has decided that the suggested retail price to the consumer for the 8-ounce can will be $0.50. The only unit variable costs for the product are $0.18 for materials and $0.06 for labor. The company intends to give retail- ers a margin of 20 percent off the suggested retail price and wholesalers a margin of 10 percent of the retailers’ cost of the item. a. At what price will Diversified Citrus Industrie to wholesalers? Diversified ns sold dur- of the news- e $250,000. 5 be selling its product b. What is the contribution per unit for Zap? c. What is the break—even unit volume in the first year? (1. What is the first-year break-even share of market? 5. Video Concepts, Inc. (VCI) manufactures a line of DVD recorders (DVDs) that are distributed to large retailers. The line consists of three models of DVDs. The following data are available regarding the models: DVD Selling Price Variable Cost Demand/Year Model per Unit per Unit (units) ModelLXl $175 $100 2,000. . Model LXZ 250 125 1,000 Model LX3 300 140 500 models already being manufactured by VC I (10 percent from Model LXI, 50 percent from Model LX2, and 60 percent from Model LX3). VCI will incur a priced version of the firm’s DC6900 per. sonal computer product line—the DC6900—X. The DC6900—X would sell for $5,900, with unit variable costs of $1,800. Projections made by an indepen- dent marketing research firm indicate that the DC6900—X would achieve a sales volume of 500,000 units next ' mmmnmwammt ' " W 1,.-.” W..w1 Mafia .._ mm... ..._. _ ., . . . WW maswwéwmmwwwfiamm» axtwarmmlawrmmmm 2; metmmwwmmmammww ~ iv, EXERCISES 51 that 30 percent of the DC6900-X sales volume would come from the higher— priced DC6900-Omega personal computer, which sells for $5,900 (with unit variable costs of $2,200). Another 20 percent of the DC6900-X sales volume would come from the economy-priced DC6900-Alpha personal computer, priced at $2,500 (with unit variable costs of $ 1,200). The DC6900-Omega unit volume is expected to be 400,000 units next year, and the DC6900-Alpha is expected to achieve a 600,000-unit sales level. The fixed costs of launching the DC6900—X have been forecast to be $2 million during the first year of com— mercialization. Should Mr. Leonard add the DC6900—X model to the line of personal computers? Why? . A sports nutrition company is examining whether a new high-performance sports drink should be added to its product line. A preliminary feasibility analysis indicated that the company would need to invest $175 million in a new manufacturing facility to produce and package the product. A financial analysis using sales and cost data supplied by marketing and production per- sonnel indicated that the net cash flow (cash inflows minus cash outflows) would be $6.1 million in the first year of commercialization, $7.4 million in year 2, $7.0 million in year 3, and $5.5 million in year 4. Senior company executives were undecided whether to move forward with the development of the new product. They requested that a discounted cash flow analysis be performed using two different discount rates: 20 percent and 15 percent. a. Should the company proceed with development of the product if the discount rate is 20 percent? Why? b. Does the decision to proceed with development of the product change if the discount rate is 15 percent? Why? . Net-4—You is an Internet Service Provider that charges its 1 million customers $19.95 per month for its service. The company’s variable costs are $.50 per customer per month. In addition, the company spends $.50 per month per customer, or $6 million annually, on a customer loyalty program designed to retain customers. As a result, the company’s monthly customer retention rate was 78.8 percent. Net-4-You has a monthly discount rate of 1 percent. a. What is the customer lifetime value? b. Suppose the company wanted to increase its customers’ monthly reten- tion rate and decided to spend an additional $.20 per month per cus tomer to upgrade its loyalty program benefits. By how much must Net-4—You increase its monthly customer retention rate so as not to reduce customer lifetime value resulting from a lower customer margin? . The agual planning process at Century Office Systems, Inc. had been arduous but produced a number of important marketing initiatives for the next year. Most notably, company executives had decided to restructure its product-marketing team into two separate groups: (1) Cogporate Office Systems and (2) Home; Office Systems. Angela Blake was assigned responsibility for the Hgmeflfig Systems group, which would market the companfisrwordpmgefimghardware arWrgfgr/hgmeandofificeathome use by individuals. Her marketing plan, which included a sales forecast for next year of $25 million, was the result of a detailed market analysis and negotiations with individuals both inside and outside the company. Discussions with the sales director indicated that 40 per- cenkofthtcompammmesiorcewddbededieatedtoselmigpmmoflthe Wgroup. Sales representatives would receive a 12' percent commission on sales of home office systems. Under the new organizational M... structure, the Home Office Systems group would be charged with 40 percent of _._\fi 52 CHAPTER 2 FINANCIAL ASPECTS OF MARKETING MANAGEMENT thehudgeted sales force expenditure. The swwd f ' e nefits of the sales force and noncommi ‘ selling costs for both the The ade budget contained three elements: tide magazine advertising, cooperative newspaper advertising with Century Office Systems, Inc. dealers, and sales promotion materials including product brochures, technical manuals, catalogs, and pointof—purchase displays. Trade magazine ads and sales promotion materials were to be developed by the company’s advertising and public relations agengg. ProdWia placement costs were budgeted at $300,000. Cooperative advertising copy for both newspaper and radio use had budgeted production costs LEV $1WCentuw Office Systems, Incis cooperative adveafiiEiTi—gaallowance policy stated that the company would allocate 5 percent of company sales to dealers to promote its office systems. Dealers always used their complete cooperative advertising allowances. Meetings with manufacturing and operations personnel indicated that the direct costs of material and labor and direct factory overhead to produce 2 the Home Office System product line represented 50 percent of sales. The accounting department would assign $600,000 in indirect manufacturing overhead (for example, depreciation, maintenance) to the product line and $300,000 for administrative overhead (clerical, telephone, office space, and so forth). Freight for the product line would average 8 percent of sales. Blake’s staff consisted of two product managers and a marketing assistant. Salaries and fringe benefits for Ms. Blake and her staff were $250,000 per year. a. Prepare a proforma income statement for the Home Office Systems group given the information provided. b. Prepare a proforma income statement for the Home Office Systems group given annual sales of only $20 million. c. At what level of dollar sales will the Home Office Systems group break even? wmwwm “NAVWWPWMWMAWW,“ MW, a... W . ,. yawn-v Vicar..- .1 ...
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