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Your company is planning to print a catalog of its products and undertake a direct mail campaign
Your company is planning to print a catalog of its products and undertake a direct mail campaign. The cost of printing the catalog is $20,000 plus $0.10 per catalog. The cost of mailing each catalog (including postage, order forms, and buying names from a mail-order database) is $0.15. In addition, your company plans to include direct reply envelopes in its mailings and incurs $0.20 in extra costs for each direct mail envelope used by a respondent. The average size of a customer order is $40, and the company’s variable cost per order (due primarily to labor and material costs) averages about 80% of the order’s value—that is, $32. The company plans to mail 100,000 catalogs. Q2: Let us assume a response rate of 6%. Which which % of variable costs (above, 80%) does the company break even. Q3: Report the profits for response rates raning from 3% to 10% (increments of 1%). Use a data table for this exercise. Q4: Report the profits for response rates raning from 3% to 10% (increments of 1%) and fixed printing costs of $10k, $20k, $30k, and 40k. Use a data table for this exercise.
Expert Solution
1. Calculation of net benefit
| Particulars | Amount |
| No of catalogues | 100000 |
| Sales @$40 | 4,000,000 |
| Less variable cost @$32 | (3,200,000) |
| Contribution | 800,000 |
|
Less: Printing cost Fixed 20,000 Printing variable cost @$0.10 10,000 Mailing cost @ $0.20 20000 |
(50,000) |
| Net profit | 750,000 |
2. If response rate is 6%, then
| Particulars | Amount |
| No of orders | 6000 |
| Sales @$40 | 240,000 |
| Less variable cost @$32 | (192,000) |
| Contribution | 48,000 |
|
Less: Printing cost Fixed 20,000 Printing variable cost @$0.10 10000 Mailing cost @ $0.20 20000 |
(50,000) |
| Net profit | 26,200 |
Above 80%, variable cost is $0.10 +$0.20 =$0.30 and fixed printing cost of $20000.
Percentage above 80% for break even = 50000/240000 =20.83%
3. If fixed printing cost is 10K, Irrespective of response rate, printing cost will be same except fixed cost
| Particulars | 3% | 4% | 5% | 6% | 7% | 8% | 9% | 10% |
| No of orders | 3000 | 4000 | 5000 | 6000 | 7000 | 8000 | 9000 | 10000 |
| Sales | 120,000 | 160,000 | 200,000 | 240,000 | 280,000 | 320,000 | 360,000 | 400,000 |
| less: Variable cost | 96,000 | 128,000 | 160,000 | 192,000 | 224,000 | 256,000 | 288,000 | 320,000 |
|
less: Printing cost 10000+30000 |
40000 | 40000 | 40000 | 40000 | 40000 | 40000 | 40000 | 40000 |
| Profit | (16000) | (8000) | 0 | 8000 | 16000 | 24000 | 32000 | 40000 |
If fixed printing cost is 20K, Irrespective of response rate, printing cost will be same except fixed cost
| Particulars | 3% | 4% | 5% | 6% | 7% | 8% | 9% | 10% |
| No of orders | 3000 | 4000 | 5000 | 6000 | 7000 | 8000 | 9000 | 10000 |
| Sales | 120,000 | 160,000 | 200,000 | 240,000 | 280,000 | 320,000 | 360,000 | 400,000 |
| less: Variable cost | 96,000 | 128,000 | 160,000 | 192,000 | 224,000 | 256,000 | 288,000 | 320,000 |
|
less: Printing cost 20000+30000 |
50000 | 50000 | 50000 | 50000 | 50000 | 50000 | 50000 | 50000 |
| Profit | (26000) | (18000) | (10000) | (2000) | 6000 | 14000 | 22000 | 30000 |
If fixed printing cost is 30K, Irrespective of response rate, printing cost will be same except fixed cost
| Particulars | 3% | 4% | 5% | 6% | 7% | 8% | 9% | 10% |
| No of orders | 3000 | 4000 | 5000 | 6000 | 7000 | 8000 | 9000 | 10000 |
| Sales | 120,000 | 160,000 | 200,000 | 240,000 | 280,000 | 320,000 | 360,000 | 400,000 |
| less: Variable cost | 96,000 | 128,000 | 160,000 | 192,000 | 224,000 | 256,000 | 288,000 | 320,000 |
|
less: Printing cost 30000+30000 |
60000 | 60000 | 60000 | 60000 | 60000 | 60000 | 60000 | 60000 |
| Profit | (36000) | (28000) | (20000) | (12000) | (4000) | 4000 | 12000 | 20000 |
If fixed printing cost is 40K, Irrespective of response rate, printing cost will be same except fixed cost
| Particulars | 3% | 4% | 5% | 6% | 7% | 8% | 9% | 10% |
| No of orders | 3000 | 4000 | 5000 | 6000 | 7000 | 8000 | 9000 | 10000 |
| Sales | 120,000 | 160,000 | 200,000 | 240,000 | 280,000 | 320,000 | 360,000 | 400,000 |
| less: Variable cost | 96,000 | 128,000 | 160,000 | 192,000 | 224,000 | 256,000 | 288,000 | 320,000 |
|
less: Printing cost 40000+30000 |
70000 | 70000 | 70000 | 70000 | 70000 | 70000 | 70000 | 70000 |
| Profit | (46000) | (38000) | (30000) | (22000) | (14000) | (6000) | 2000 | 10000 |
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