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CVP: Contribution margin, Break-even, Market Share

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COST-VOLUME-PROFIT ANALYSIS PROBLEM

H.M. Alger has just become product manager for Brand K. Brand K is a consumer product with a retail price of \$1.00. Retail margins on the product are 23%, while wholesalers have a 10% markup. Variable manufacturing costs for Brand K are \$0.10 per unit. Fixed manufacturing costs = \$800,000.

The advertising budget for Brand K is \$500,000. The Brand K product manager's salary expenses total \$35,000. Brand K's salespeople are paid entirely by commission, which is 10%. Shipping costs, breakage, insurance, and so forth are \$0.05 per unit.

In 2004, Brand K and its direct competitors sell a total of 20 million units annually; Brand K has 25% of this market. In 2004, what is (please write your answer on the line after the question):

1. The unit contribution (contribution margin per unit) for Brand K? ______________________

2. Brand K's break-even point? __________________________

3. The market share Brand K needs to break even? ________________________

4. Brand K's profit? _____________________________

In 2005, industry demand is expected to increase to 25 million units per year. Mr Alger is considering raising his advertising budget to \$1 million. In 2005, if the advertising budget is raised:

5. How many units will Brand K have to sell to break even? ____________________________

6. How many units will Brand K have to sell to make the same profit as in 2004? ______________________

Upon reflection, Mr. Alger decides not to increase Brand K's advertising budget. Instead, he thinks he might give retailers an incentive to promote Brand K by raising their margins from 23% to 34%. The margin increase would be accomplished by lowering the price of the products to retailers. Wholesaler markup would remain the same at 10%. If retailer margins are raised to 34% in 2005, then:

7. How many units will Brand K have to sell to have the same profits in 2005 as it did in 2004? ________________

8. How many units will Brand K have to sell to break even? ________________________

HINTS:

A. The \$1.00 price is the retail price. You need to work backwards from that price to calculate the retailer's cost and the wholesaler's cost in order to determine the manufacturer's selling price of Brand K.

B. Markup is not the same as margin. Markup is profit expressed as a percentage of cost, while margin is profit expressed as a percentage of sales price. For example, an item that cost 80 cents and sells for \$1.00 has a 25% markup (.20/.80) but a 20% margin (.20/1.00).

Solution Summary

COST-VOLUME-PROFIT ANALYSIS PROBLEM

H.M. Alger has just become product manager for Brand K. Brand K is a consumer product with a retail price of \$1.00. Retail margins on the product are 23%, while wholesalers have a 10% markup. Variable manufacturing costs for Brand K are \$0.10 per unit. Fixed manufacturing costs = \$800,000.

The advertising budget for Brand K is \$500,000. The Brand K product manager's salary expenses total \$35,000. Brand K's salespeople are paid entirely by commission, which is 10%. Shipping costs, breakage, insurance, and so forth are \$0.05 per unit.

In 2004, Brand K and its direct competitors sell a total of 20 million units annually; Brand K has 25% of this market. In 2004, what is (please write your answer on the line after the question):

1. The unit contribution (contribution margin per unit) for Brand K? ______________________

2. Brand K's break-even point? __________________________

3. The market share Brand K needs to break even? ________________________

4. Brand K's profit? _____________________________

In 2005, industry demand is expected to increase to 25 million units per year. Mr Alger is considering raising his advertising budget to \$1 million. In 2005, if the advertising budget is raised:

5. How many units will Brand K have to sell to break even? ____________________________

6. How many units will Brand K have to sell to make the same profit as in 2004? ______________________

Upon reflection, Mr. Alger decides not to increase Brand K's advertising budget. Instead, he thinks he might give retailers an incentive to promote Brand K by raising their margins from 23% to 34%. The margin increase would be accomplished by lowering the price of the products to retailers. Wholesaler markup would remain the same at 10%. If retailer margins are raised to 34% in 2005, then:

7. How many units will Brand K have to sell to have the same profits in 2005 as it did in 2004? ________________

8. How many units will Brand K have to sell to break even? ________________________

HINTS:

A. The \$1.00 price is the retail price. You need to work backwards from that price to calculate the retailer's cost and the wholesaler's cost in order to determine the manufacturer's selling price of Brand K.

B. Markup is not the same as margin. Markup is profit expressed as a percentage of cost, while margin is profit expressed as a percentage of sales price. For example, an item that cost 80 cents and sells for \$1.00 has a 25% markup (.20/.80) but a 20% margin (.20/1.00).

\$2.19