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Marketing Math Practice Problems Executives of Studio Recordings, Inc

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Marketing Math Practice Problems

1. Executives of Studio Recordings, Inc., produced the latest compact disk by the Starshine Sisters Band, titled Sunshine/Moonshine.  The following cost information pertains to the new CD:

 

DVD package and Disc (direct material and labor)                           $1.50/CD

Songwriters’ royalties                                                             $0.50/CD

Recording artists’ royalties                                                     $1.00/CD

Advertising and Promotion                                                    $275,000

Studio Recordings, Inc. overhead                                         $250,000

Selling price to CD distributor                                                $10.00

 

              Calculate the following:

1. Contribution per CD unit
2. Break-even volume in CD units and dollars
3. Net Profit if 1 million CDs are sold (EBIT)
4. Necessary CD unit volume to achieve $200,000 profit

 

2. George Jones, the brand manager for Smile-Brite toothpaste is considering adding a

cinnamon-flavored toothpaste to the Smile-Brite product line. A consultant was engaged

last year to assess the feasibility of introducing the new flavor. The consultant's report

was optimistic, suggesting that, with aggressive advertising, strong sales were likely. The

cinnamon toothpaste would be sold in drug stores, food stores and mass merchandisers,

and would be preprinted with a retail price of $6.00 per tube. The retail stores take a

margin of 30%. Wholesalers take a margin of 10%. The total market for oral care

products is 200,000,000 units, of which toothpaste represents 75%.

 

The variable manufacturing costs needed to produce one tube of cinnamon-flavored

toothpaste total $1.55. The fixed manufacturing costs are $350,000.

 

Mr. Jones decided that to make the new toothpaste a better value he would include spool of cinnamon-flavored dental floss with the purchase of each tube of toothpaste. Each spool of dental floss costs $.25. Following the consultant's advice, Mr. Jones is contemplating two advertising levels – aggressive ($1,000,000 per year) and very aggressive ($2,000,000 per year). Mr. Jones will have to hire another assistant brand manager to oversee the marketing effort for the cinnamon-flavored toothpaste, at a salary of $55,000.  The sales people are paid entirely on commission, which is 10% of the selling price.

 

1. What unit sales are required for the cinnamon-flavored toothpaste to break even at the

"aggressive" and "very aggressive" advertising levels?

 

2. What share of the toothpaste market does the cinnamon-flavored toothpaste have at break-even for the “aggressive” advertising level?

 

3. What is the profit impact of a 10% share of the toothpaste market and the "very

aggressive" advertising level? (not related to question #2)

 

4.  If the retail shops required a higher margin, 35%, how many tubes of cinnamon-flavored toothpaste would have to be sold in order to break even at the "very aggressive" advertising level?

 

3. After spending $200,000 for research and development, chemists at Diversified Citrus Industries have developed 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 eight-ounce can and will be introduced to the breakfast drink market, which is estimated to be equivalent to 20 million eight-ounce cans nationally.

 

One major management concern is the lack of funds available for marketing.  Accordingly, management has decided to use newspaper (rather than television) to promote Zap in the introductory year and distribute Zap in major metropolitan areas that account for 75 percent of the U.S. breakfast drink volume.  Newspaper advertising will carry a coupon that will entitle the consumer to receive $0.25 off the price of the first can purchased.  The retailer will receive the regular margin and be reimbursed coupons by Diversified Citrus.  Past experience indicates that for every five cans sold during the introductory year, one coupon will be returned.  The cost of the newspaper advertising campaign (excluding coupon returns) will be $250,000.  Other fixed overhead costs are expected to be $75,000 per year.

 

Management has decided that the suggested retail price to the consumer of the eight-ounce can will be $2.00.  The only unit variable costs for the product are $0.55 for materials and $0.25 for labor.  The company intends to give retailers a margin of 30 percent off the suggested retail price and the wholesalers a margin of 10 percent of the retailers cost of the item.

 

1. 1. At what price will Diversified Citrus be selling its products to wholesalers?
   2. What is the contribution per unit of Zap?
   3. What is the break-even unit volume in the first year?
   4. What is the first-year break-even share of market?