Marketing analysis pricing

| October 22, 2018


Directions: below are several typical
business situations. read them carefullyand answer the
questions. a solution sheet will be
handed out later.

break even [units] = total fixed costs
per unit

1. Steve
Forbes’ baseball team, the Capitalist
Tools, has a total annual salary expense of $20 million and play 100 games
a year, at an average ticket price of
$22 per seat. It costs $2 per seat to
clean the stadium after the game.

many seats per game must be
sold to break even?

B. Joe Hotshot has just become a free
agent. His asking price to sign is $4
million for one season. How many more
fans must Joe attract to cover his salary if the tools sign him?

2. Sinkers,the giant donut manufacturer,
has developed a terrific new product called ‘The Slam Dunk’-a donut that holds the coffee in the center for
instant dipping. The new production
process requires $5 million in equipment and another $1 million to file for
patent protection. Actual batch
production costs include: flour at
$5.00; sugar at $ 10.00; salt at $2.50 ; oil at $5.00; yeast at $2.50, and powdered sugar at $5.00. Sinkers is considering selling prices of
$6.00 per dozen [each batch makes 10 dozen donuts].

is the contribution per batch?

How many batches does sinkers need to produce and sell to break even?

C. Sinkers won’t go ahead with this project
unless it will generate profits of $3 million.
How many batches does this represent?

3. Noose to you,the
cordage company, has developed a new stitch ligature for individual
mortalities, to be marketed as tight
knots. R&D expenses to date have
been $ 200,000 on salaries, $500,000 on lab time and $300,000 for FDA review
paperwork. Noose hopes to sell this
product for $250.00 per unit. Cording
costs $25.00. Labor to tie the knots
typically costs $100.00. Witness expense
is somewhat dependent upon location, but usually costs $25.00.

A. How
many units does noose have to sell to break even?

Noose expects tight knots to cannibalize their older product
old people Expire [or r.o.p.e.]in the amount of $1
million in sales.

B. If
the contribution margins are the same how many Tight Knots does Noose have to
sell to breakeven including covering the lost sales on ROPE?

4. Spit
Curl, the group manager for UpperCrust hairspray is about to launch a new line
of hairspray called HelmetHead, designed to appeal to a more cost conscious consumer. Both brands are chemically identical, the
real difference is price. HelmetHead is
to be test marketed in Des Moines because buyers there fit the user
profile. Spit has developed the
following information:

UpperCrust shelf price $3.50 per can
HelmetHead shelf price $2.50
per can
and applicator cost [both] $0.40 per can
factory overhead $2,000,000
HelmetHead oh $750,000
labor [both brands] $0.20
per can
Ingredients $0.30
per can
for UpperCrust $1.00 per can
for HelmetHead $0.50
per can
commission [both brands] $0.10 per can
fee-UpperCrust $0.50
per can
fee- HelmetHead $0.25 per can
nat’l hairspray mkt 50,000,000 units
potential HelmetHead
Units in Des Moines 100,000 units
nat’l UpperCrust sales 10,000,000 units
sale of UpperCrust in
Des Moines 500,000 units
usage of HelmetHead
Hairspray users 5 cans per year

A. What is
the contribution per can for each brand?

B. Management
insists upon 10% market share results in test marketing before launching a full
scale campaign. How many loyal userswould be needed in Des Moines in the next year to obtain this
share goal?

C. What multiple
is UpperCrust’s current share versus its breakeven point?

D. What is
the break even in units for HelmetHead?

E. Spit expects HelmetHead to cannibalize UpperCrust’s
national share by 7.5%. Taking this
contribution hit into account [i.e., covering it], what would Spit calculate
HelmetHead break even units to be?

F. What
are the Gross Profit percentages for UpperCrust and HelmetHead?

G. Several
years in the future when HelmetHead is selling 5,000,000 bottles nationally and
UpperCrust is selling 9,000,000 nationally what is the average selling price
for the entire shampoo business at Spit Curl?

H. Spit
Curl is considering a new shampoo called
SuperModel would have a super shine additive that costs an additional
$0.20 per bottle in materials. All other
costs would be the same is UpperCrust.
If Spit uses a cost plus pricing approach and wants to achieve a 33%
gross margin for SuperModel shampoo what price would they need to sell it ?

I. If they
sold SuperModel directly to beauty salons that required a 40% margin on all
products, to protect their retailer what Manufacturers Suggested Retail Price (MSRP)
should Spit Curl set for SuperModel?

Bonus question
Spit decides to offer a promotion – a 2 oz sample
of UpperCrust plus a $1.00 off coupon for a full 8 oz. bottle. The promotion
will be mailed to 50,000 households within a 15 mile radius of Des Moines. The cost of producing and mailing the coupon
& sample totals $40,000.

How many recipients of the promotion must become loyal users to cover the cost of the promotion in one year?

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