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# Mgmt 324 Exam Practice Answers - MARKETING BREAK-EVEN...

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M ARKETING B REAK -E VEN P RACTICE (SPRING 2011) 1 of 6 February 15, 2011 Q UAKER I NSTANT O ATMEAL You are analyzing Quaker Instant Oatmeal as a consultant. Lafayette Grocery sells a box of Plain Quaker Instant Oats for \$2.00 to consumers. The grocery owner tells you that she gets a 25% margin on each package. The local distributor for Quaker, Lafayette Snack Company, charges a 20% markup. The manager of the Quaker Oatmeal Plant gives you the following data about the production of the cereal. There are no other relevant costs. Equipment: \$17 million cost, straight-line depreciated over 10 years, 0 salvage value Product line workers and managers (includes salary & benefits): \$300,000/year Advertising: \$2,000,000 per year Oatmeal ingredient: \$0.50/box Individual wrappers: \$0.025/packet. Each box contains 8 packets. Delivery: \$0.15 per box a) What is the selling price from Lafayette Snack Company to Lafayette Grocery for a box of oatmeal? What is the selling price from Quaker Oatmeal plant to Lafayette Snack Company for a box of oatmeal? The selling price from Lafayette Grocery is \$2.00 and it gets a 25% margin. Margin= (price – cost)/ price Cost for Lafayette Grocery = price ( 1 – margin ) = \$2.00* (1 – 0.25 )= \$ 1.50 Therefore the selling price from Lafayette Snack to Lafayette Grocery is \$ 1.50 Lafayette Snack charges a 20% markup, and the selling price is \$ 1.50 Markup = (price – cost )/ cost Cost for Lafayette Snack = price / ( 1+ markup) = \$ 1.50/ 1.2= \$ 1.25 So the selling price from Quaker to Lafayette Snack is \$ 1.25 b) Assume that all oatmeal produced at this plant is sold under the same distribution agreement, price, and margins as Lafayette Grocery. What is the unit contribution for a box of oatmeal for Quaker Oatmeal Plant? Unit Contribution = Unit Price – Unit variable cost So Unit Contribution =1.25 – (0.5+ 0.025 *8 + 0.15) = 1.25 – 0.85 =\$ 0.4

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M ARKETING B REAK -E VEN P RACTICE (SPRING 2011) 2 of 6 February 15, 2011 c) What is the Total Break Even Unit Volume (TBEV) for Plain Oatmeal? (Use accounting B/E) Fixed Cost = 2 M + 0.3 M= 2.3 M Depreciation = 17 M/10 = 1.7 M So TBEV = ( 17M /10 +2.3 M ) / 0.4 = 10 M d) The manager of Quaker Oatmeal Plant wishes to make \$2,000,000 in profit each year. How many boxes of Plain Oatmeal must they sell in order to achieve this amount of profit?
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