ALEXANDER CHERNEV Quantitative Analysis Exercise

ALEXANDER CHERNEV

Quantitative Analysis Exercise

Product X is a consumer product with a retail price of $9.95. Retailer’s margins on the product

are 40% (based on the selling price to consumers) and wholesaler’s margins are 8% (based on the

selling price to retailers). The size of the market is $300,000,000 annually (based on retail sales);

product X’ share (in dollars) of this market is 17.3%.

The fixed costs involved in manufacturing Product X are $1,400,000 and the variable

costs are $0.86 per unit. The advertising budget for Product X is $2,000,000. Miscellaneous variable costs (e.g., shipping and handling) are $0.04 per unit. Salespeople are paid

entirely by a 12% commission based on the manufacturer’s selling price. Product manager’s salary and expenses are $90,000.

Assuming that you are the manufacturer, calculate the following:

1. What is the unit margin (contribution) for Product X (in $)?

2. What is Product X’s break-even volume?

3. What market share (based on retail sales) did Product X need to break even?

4. What is Product X’s (annual) net profit?

5. Calculate the increase in sales over the current volume needed to maintain the

current profit level if the manufacturer doubles its advertising expenditures.

6. Calculate the increase in sales over the current volume needed to maintain the

current profit level if the manufacturer lowers its price by 25%.

7. Calculate the increase in sales over the current volume needed to maintain the current profit level if the manufacturer increases the sales force’s commission to 15%.

Calculations Guidelines:

When solving problems:

•

Round manufacturer, wholesale, and retail prices to the second decimal point (e.g., $9.49)

•

Round sales revenues and net income (profits) to the second decimal point (e.g.,

$3,625,769.64)

•

Round sales volumes to whole numbers (e.g., 345,312 units)

• Do not round any other numbers

When reporting solutions:

•

Round prices, profits, and market shares to the second decimal point (e.g., $9.95 and 57.32%)

•

Round sales volumes to whole numbers (e.g., 345,312 units)

©2006-2009 by Alexander Chernev. Professor Alexander Chernev (Kellogg School of Management, Northwestern University) prepared this

exercise. To request permission to reproduce materials, e-mail p..s@marketingcases.com. No part of this publication may be

reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,

photocopying, recording, or otherwise—without a written permission of the author. Rev. 10/1/2009

Case 0869