Problem Set Business Mathematics

MBA645 Problem Set 1. Executives of Monaffiche, a firm producing high-quality reproductions of artworks, produced their latest vintage-era art poster by famous artist Henri Wales, titled Mood Bloo. The following costs pertain to the new poster art: Poster (materials & labor) Artist’s royalties Framing (materials & labor) Advertising and promotion Monaffiche’s overhead Selling price to distributors $9.15/poster $0.85/poster $11.00/poster $175,000 $650,000 $40.00 Calculate the following: a. b. c. d. Contribution per poster Break-even volume in poster units and dollars Net profit if 100,000 posters are sold Necessary poster unit volume to achieve a minimum required $500,000 profit e. Monaffiche’s informal research efforts estimate the market for this particular poster to be about 50,000 units. Will this poster be profitable? Will it return their minimum required profit? 2. StreamKast markets video streaming servers and offers its own consumer streaming service. Presently, StreamKast is faced with a decision as to whether it should obtain the streaming rights to the Russ Meyer library of cult films. If the firm moves ahead with this licensing agreement, StreamKast’s up front investment in the project would be $150,000 for initial contract and server acquisition. It estimates the total market for these types of cult films is 150,000 viewings. Other data available are as follows: Annual Cost of distribution rights for film Graphic design and ongoing web updates New streaming hardware and associated maintenance Additional overhead Advertising Royalties to Meyer estate (per 1,000 viewings) Licensing fees to studio (per 1,000 viewings) $125,000 5,000 15,000 1,000 35,000 1500 500 StreamKast suggested price for each viewing is $5 per viewing. a) What is StreamKast’s unit contribution and contribution margin? b) What is the break-even point in units? In dollars? c) At the break-even point, what market share would StreamKast have in the market for these sorts of cult films? d) What share of the market would the film have to achieve to earn a 20 percent return on Streamcast’s investment the first year? 9.11.16 2 3. The group product manager for ointments at Cosmecorp was reviewing price and promotion alternatives for two products: Cosme-Heal and Cosme-Clear. Both products were designed to reduce skin irritation, but Cosme-Clear was primarily a cosmetic treatment whereas Cosme-Heal also included a compound that eliminated rashes. The price and promotion alternatives recommended for the two products by their respective brand managers included the possibility of using additional promotion or a price reduction to stimulate sales volume. A volume, price, and cost summary for the two products follows: Cosme-Heal Cosme-Clear Unit price $2.00 $1.00 Unit variable costs 1.40 0.25 Unit contribution 0.60 0.75 Unit volume 1,000,000 units 1,500,000 units Each brand manager included a recommendation to either reduce price by 10 percent or invest an incremental $150,000 (per product) in advertising. a. What absolute increase in unit sales and dollar sales will be necessary to recoup the incremental increase in advertising expenditures for Cosme-Heal? For Cosme-Clear? b. How many additional sales dollars must be produced to cover each $1.00 of incremental advertising for Cosme-Heal? For Cosme-Clear? c. What absolute increase in unit sales and dollar sales will be necessary to maintain the level of total contribution dollars if the price of each product is reduce by 10 percent? 4. After spending $300,000 for research and development, chemists at MegaGo, Inc. have developed a new energy drink. The drink, called Wham, will provide the consumer with twice the amount of stimulants currently available in energy drinks plus 100% of the minimum daily requirements of vitamin C. Wham will be packaged in an 8-ounce can and will be introduced to the energy drink market, which is estimated to be equivalent to 50 million 8-ounce cans nationally. One major management concern is the lack of funds available for marketing. Accordingly, management has decided to use newspapers (rather than television) and social media to promote Wham in the introductory year and distribute Wham in major metropolitan areas that account for 65 percent of U.S. energy drink volume. Newspaper advertising will carry a coupon that will entitle the consumer to receive $0.75 off the price of the first can purchased. The retailer will receive the regular margin and be reimbursed for redeemed coupons by MegaGo. 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 coupons 3 returns) will be $1,250,000. Online marketing programs will cost $750,000 annually. Other fixed overhead costs are expected to be $650,000 per year. Management has decided that the suggested retail price to the consumer for the 8ounce can will be $1.50. The only unit variable costs for the product are $0.65 for materials and $0.05 for labor (as well as any UVC burden caused by coupon redemption). The company intends to give retailers a margin of 20 percent off the suggested retail price and wholesalers a margin of 10 percent of the retailers’ cost of the item. a. b. c. d. At what price will MegaGo be selling its product to wholesalers? What is the contribution per unit for Wham? What is the break-even unit volume in the first year? What is the first-year break-even share of market? 5. Viewmania manufactures a line of Blu-Ray videodisc players that are distributed to large retailers. The line consists of three models of players. The following data are available regarding the models: Model Selling price per unit Variable cost per unit Demand/Year (units) Model VM100 $175 $100 2,000 Model VM200 250 125 1,000 Model VM300 300 140 500 Viewmania is considering the addition of a fourth model to its line of Blu-ray players. This model would be sold to retailers for $375. The variable cost of this unit is $225. The demand for the new Model VM400 is estimated to be 300 units per year. Sixty percent of these unit sales of the new model is expected to come from other models already being manufactured by Viewmania (10 percent from Model VM100, 30 percent from Model VM200, and 60 percent from Model VM300). Viewmania will incur ongoing fixed costs of $30,000 to add the new model to the line. Based on the preceding data, should Viewmania add the new Model VM400 to its line of Blu-Ray players? 6. Max Leonard, vice president of marketing to Dysk Computer, Inc. must decide whether to introduce a midpriced version of the firm’s DC6900 laptop line – the DC6900-X. The DC6900-X would sell for $3,900, with unit variable costs of $1,800. Projections made by an independent marketing research firm indicate that the DC6900-X would achieve a sales volume of 500,000 units next year, in its first year of commercialization. One-half of the first year’s volume would come from competitors’ laptops and market growth. However, a consumer research study indicates that 30 percent of the DC6900-X sales volume would come from the higher-priced DC6900-Omega personal computer, which sells for $5,900 (with unit variable costs of $2,200). Another 20 percent of the DC6900-X sales volume would come from the economy-priced DC6900-Alpha personal computer, price at $2,500 (with unit variable costs of $1,200). The DC6900-Omega unit volume is expected to 400,000 units next year, and the DC6999-Alpha is expected to achieve a 600,000- 4 unit sales level. The fixed costs of launching the DC6900-X have been forecast to be $2 million during the first year of commercialization. Should Mr. Leonard add the DC6900-X model to the line of personal computers? Why? 7. Net-r-You is an Internet Service Provider that charges its 1 million customers $19.95 per month for its service. The company’s variable costs are $0.50 per customer per month. In addition, the company spends $0.50 per month per customer, or $6 million annually, on a customer loyalty program designed for retail customers. As a result, the company’s monthly customer retention rate was 78.8 percent. Net-4-you has a monthly discount rate of 1 percent. a. What is the customer lifetime value? b. Suppose the company wanted to increase its customers’ monthly retention rate and decided to spend an additional $0.20 per month per customer to upgrade its loyalty program benefits. By how much must Net-4-You increase its monthly customer retention rate to avoid reducing customer lifetime value resulting from a lower customer margin? 8. The annual planning process at Century Office Systems, Inc. had been arduous but produced a number of important marketing initiatives for the next year. Most notably, company executives had decided to restructure its product-marketing team into two separate groups: (1) Corporate Office Systems and (2) Home Office systems. Angela LeBlanc was assigned responsibility for the Home Office Systems group, which would market the company’s multi-function imaging hardware and software for home and office-at-home use by individuals. Her marketing plan, which included a sales forecast for next year of $35 million, was the result of a detailed market analysis and negotiations with individuals both inside and outside the company. Discussions with the sales director indicated that 40 percent of the company sales force would be dedicated to selling products of the Home Office Systems group. Sales representatives would receive a 17 percent commission on sales of home office systems. Under the new organizational structure, the Home Office systems group would be charged with 40 percent of the budgeted sales force expenditure. The sales director’s budget for salaries and fringe benefits of the sales force and non-commission selling costs for both the Corporate and Home Office Systems groups was $10.5 million. The advertising and promotion budget contained three elements: trade magazine advertising, cooperative newspaper advertising with Century Office Systems, Inc. dealers, and sales promotion materials including product brochures, technical manuals, catalogs, and point-of-purchase displays. Trade magazine ads and sales promotion materials were to be developed by the company’s advertising and public relations agency. Production and media placement costs were budgeted at $400,000. Cooperative advertising copy for both newspaper and radio use had budgeted production costs of $175,000. Century Office Systems, Inc.’s cooperative advertising allowance policy stated that the company would allocate 5 percent of company sales 5 to dealers to promote its office systems. Dealers always used their complete cooperative advertising allowances. Meetings with manufacturing and operations personnel indicated that the direct costs of material and labor and direct factory overhead to produce the Home Office System product line represented 50 percent of sales. The accounting department would assign $600,000 in indirect manufacturing overhead (for example, depreciation, maintenance) to the product line and $550,000 for administrative overhead (clerical, telephone, office space, and so forth). Freight for the product line would average 8 percent of sales. LeBlanc’s staff consisted of two product managers and a marketing assistant. Salaries and fringe benefits for Ms. LeBlanc and her staff were $500,000 per year. a. Prepare a pro forma income statement for the Home Office Systems group given the information provided. b. Prepare a pro forma income statement for the Home Office Systems group given annual sales of only $20 million. c. At what level of dollar sales will the Home Office Systems group break even?

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