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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

## Contribution Per Unit, Break Even Analysis - Zig Microwaves

Please see the attachment for the details. I am seeking the right formulas and some help in answering these 6 questions. I have search the internet for examples and coming up with no luck. I appreciate your help in attaining the solutions to these questions.

As the Marketing Manager for the Zig brand of microwave ovens in a large consumer products company you must answer the questions found below with the following financial information regarding your product.

Total market for Microwave Ovens 5 million units
Current yearly sales of Zig brand 750,000 units
Direct factory labor \$13.20 per unit (VC)

Raw materials
Salesperson's Commissions \$50 per unit (VC)
10% of Manufactures Selling Price (VC)
Retail selling price \$300 per unit
Retailers margin 20%
Jobber's margin 20%
Wholesaler's margin 15%
Sales travel expenses \$800,000 (FC)

Distribution channel is Manufacturer &#61614; Wholesaler &#61614; Jobber &#61614; Retailer

Note:
In order for you have the correct answers for the following six questions you must determine the selling price for the manufacturer, The selling price for the manufacturer is \$163.20. Please show all calculations that end up with the selling price based on the information above.

Questions

1. What is the contribution per unit for the Zig brand? Answer ____________________

2. What is the break even volume in units and in dollars? Answer ___________________

3. What market share does the Zig brand need to break even? Answer _______________

4. What is the current total contribution? Answer ________________________________

5. What is the current before tax profit of the Zig brand'? ___________________________

6. What market share must Zig obtain to contribute a before tax profit of \$100 million?