Worksheet 1:

Part A: Terminology of Breakeven and Pro-forma

1. For each of the following terms, define the term, be able to calculate it, and explain how marketers
use this information in evaluating the financial impact of marketing decisions.

1. Breakeven as percentage of sales The percentage of sales at which the fixed costs are covered
and any further revenue from sales are free of any fixed cost
components.
Breakeven as % of sales = Breakeven units/Total sales
Marketers can forecast the sales of a product and determine the
risk and opportunities associated with the product line. A high
% will lead to high risk while a low % means relatively low
risk and high risk leading to profits.
2. Breakeven with profit target This means that the sales are enough to not only accomplish the
breakeven point but also the decided profit should be achieved.
The sales required for this point are given by
= (Breakeven sales+ Target Profit)/ Contribution margin per
unit
Marketers can use this to identify the number of units sold (or
total sales) required to reach the required amount of profit.
3. Contribution Margin It is the contribution per unit as a percentage of total sales. The
contribution margin (%) is given by
= (Selling price- Variable cost)/Selling price
Marketers can find out and analyze how much is left with them
after the variable cost is deducted from the selling price. The
higher the CM is, the easier it is to cover the overhead
expenses.
4. Contribution per unit The contribution per unit is the amount that is left after the
variable cost component of production is removed from the
unit’s selling price. This contribution margin still contains the
fixed cost component and is used to identify the breakeven
point.
Contribution per unit is given by
=Unit sale price- Variable cost per unit
This simply tells how much is left with the company after the
variable cost is deducted from the selling price. The higher the
CM is, the more money company has to cover its overheads.
5. Fixed Costs These are the costs that do not change even if the production is
increased or decreased within certain limits.
For example, the rent of a manufacturing plant remains the
same irrespective of the units produced.
This together with the Contribution margin forms the decision-
making part for a certain product line.
6. Gross Margin It is gross profit as a percentage of total sales. Gross /margin
(%) is given by
=Gross Profit/Total Sales
Higher gross margin eventually leads to higher income.
7. Margin of Safety (BE as % of Sales It is the percentage of forecasted sales at which the breakeven
Forecast) point will be reached. It is given by
=Breakeven sales/Forecasted sales
The lower the margin is, the lesser risk and chances of
generating higher revenues are there.
 8. Proforma Income Statement It is a financial statement that shows an organization’s adjusted
income if certain inputs are removed.
It helps marketers analyze the effect any component in the
statement might have on the overall income of the business.

2. Give 5 business decisions that are informed using Breakeven analysis.

1. The unit sales required to reach breakeven points and compare that with the unit sales forecast to
identify the riskiness of the project.
2. To determine the point after which the business can go profitable.

3. To evaluate the number of units that will be required to be sold in order to achieve a certain profit.

4. A sensitivity analysis can be performed to identify certain scenarios and then take guided decisions
to take up the project or not.
5. Finally, it helps a business to consider pricing the product such that the profits can be achieved with
minimal risks.
Part B: Practicing the Math of Breakevens

1. The WeRNuts Manufacturing company, ModelB product. Selling price $5.00 per unit, variable cost
$4.25 per unit, , Total fixed operating costs $750,000. In addition, they plan to increase advertising by
$80,000 and a profit goal of $70,000.

a. Calculate contribution per unit? 5.00-4.35= $0.75

b. Calculate total fixed costs? 750,000+80,000= $830,000

c. How many units must be sold to reach 830,000/.75= 1,106,667 units

breakeven?
d. How many units must be sold to reach 900,000/0.75= 1,200,000 units
profit target?

2. David Company has Fixed costs $200,000, Selling price $250, Variable Cost per unit $200. Sales in
2003 are forecasted to be $1,250,000

a. Calculate contribution per unit? 250-200= $50

b. Calculate total fixed costs? $200,000

c. How many units must be sold to reach 200,000/50= 4,000 units

breakeven?
d. How many units do they plan to sell? 1,250,000/250= 5,000 units

e. What is the expected Profit at BE sales are 4000. Hence fixed cost is covered.
$1,250,000 in sales? Profit= (5000-4000)*50= $50,000
f. What is the Net Margin? 50000/1250000= 4%
g. What is Contribution Margin? 50/250= 20%

h. How many units do they need to sell if 200000/(50-(.05*250))= 200000/(50-12.5)=5333.33

they wanted to make profit of 5% of =5334 units
sales?
 3. International Conventions overhead costs to produce the 3 day Marketing Conference is $90,000 and
their advertising costs are $50,000. They estimate that the variable costs for each attendee including
meals and materials are $350. They are charging a registration price per attendee of $1,500.

a. Calculate contribution per unit? $1,150

b. Calculate total fixed costs?
$140,000
g
c. What is the break even number of
attendees? 140000/1150=122 attendees
d. If the Target Profit or return is $50,000,
what are the contribution target break 190000/165.2= 166 attendees
even numbers of attendees?
e. If the international Conventions raised
their prices per attendee to $2000 what 140000/1650= 85 attendees
would their new break even attendance
be?
f. How might forecasted demand be The increase in price would result in a decrease in forecasted demand
affected with change in price? and vice versa.
4. Currently a business sells 20,000 units at a selling price of $40. Total Fixed Costs are $500,000 which
includes $80,000 (or 10% of sales $) in marketing costs. Total Variable Costs are $100,000 at output of
20,000 units. The business is looking to double their sales volumes to 40,000 units. A financial analysis
will allow you to recommend whether they should drop their price to $35.00 or increase their
advertising spend to 10% of sales in order to achieve their sales volume goals. Create pro-forma income
statements and breakeven analysis for the options described above and answer these questions:

a. What is the current variable cost per unit based on Variable cost is $5/ unit
total variable costs of $100,000 at 20,000 units?
b. What is breakeven in units, based on current sales
of 20,000 units at selling price of $40 and total
500,000/35 =14286 units
fixed costs of $500,000 and total variable costs of
$100,000.
c. What will happen to breakeven if sales 500000/(35-5)= 16667 units
increase to40,000 units, but price reduced
to $35 and fixed costs remain unchanged
d. What happen to break even if sales increase to
40,000, price remains unchanged at $40 and fixed
costs increase because total marketing costs 580000/(40-5)=16572 units
increased to 10% of sales.
e. As units sold increase, what will happen to unit As units sold increase, cost per units is
costs? reduced.
f. As units sold increase, what will happen to fixed The 420k component of fixed cost is
fixedthe rest increase and decrease
withthe increase or decrease in sales.
costs?

g. As units sold increase, what will happen to Total

Variable Costs? The total variable cost increase in
h. What observations do you make about the proportion to the units sold as it increase.
relationship between price, gross margin,
breakeven and net profit?
i. What observations to you make about relationship The variable cost remain the same for
between sales volumes, variable costs and perunit item but the fixed cost has a
breakeven? variable component which increases with
sales.Also, the breakeven points will be
changing as we increase the number
ofunit sales.
j. What observations to you make about relationship The fixed cost will be changing with
between fixed costs and volumes? increasing volume as 80k components will
increase with sales.

k. Is it better to sell product at $35 (no change in The second option, ie sell at $40 while
fixed costs) or $40 (and increase marketing to 10% increasing cost of marketing to 10%
of $sales)? Explain your answer. would be a better option since BE sales
are lower in this case.
 Worksheet 2:

Part A: Pricing Terminology

1. Based on your reading assignments, explain the following terms.
a. 5 C's of Pricing Cost:- Direct costs and Ohs form the most important component or pricing
Customer:- The worth of our product to the consumers should be more than the price of
our product.
Channels of Distribution:- Intermediaries add cost to the product and increase the final
price, hence the mediums of distribution need to be considered.
Competition:- Evaluation of competitors’ products and pricing is necessary to price our
product in a competitive manner.
Compatibility:- Our approach should be compatible with the marketing objectives.
b. Markups vs. Mark downs vs. Markups:- Markups are increments in the cost price which results in the selling price of an
Gross Margin item.
Markdowns:- Markdowns are decrements in the cost or initial selling price which result in
a reduced selling price.
Gross Margin:- Gross margin is the gross profit as a percentage of total revenue (sales
price) after the transaction has been performed.
Markups and markdowns are calculated on the initial price while gross margin is
calculated on the final selling price.
c. Manufacturers Selling Price Manufacturers selling price is the price at which the manufacturer sells the items to the
vs. Retailers Selling Price distributor/wholesaler who then sell the item to a retailer after marking up the prices to
make up for his profit.
Retailers selling price is the price at which the retailer sells the item to a consumer after
marking up again to make up for his profits.

Manufacturer→ Wholesaler→ Retailer

d. Drivers of Elasticity
1. Availability of substitutes
2. Need of consumer
3. Propensity to consume
4. Time elapsed after variation in prices

e. How Market Structure affects When the competition is high there is a high supply of commodities as different
pricing strategies companies try to dominate the markets and it also creates barriers to entry for the
companies that intend to join that market. A monopoly market has the biggest level of
barriers to entry while a perfectly competitive market has zero percent level of barriers to
entry. Firms are more efficient in a competitive market than in a monopoly structure.

f. Cannibalization
Cannibalization is when the consumer of a product switch to another product that is
manufactured by the same company. In this case, the company is losing a consumer for
product A while gaining the same consumer for another product B.

2. Be able to apply pricing methods, objectives and strategies in case situations.

Pricing Methods Pricing Objectives Pricing Strategies
Cost-plus pricing Add up cost and increase by a To have fixed margins as profit on the
fixed margin purchase of the product
Competitive pricing Know your competition and Analyze competitors and then set a price to
price accordingly make it a competitive product in the market
Price skimming Earn from early buyers, then let High price first, then reduce it slowly
others buy it as well to reach
economies of scale
Penetration pricing Gain customer base Provide goods at low price share to steal
competitors market
Value-based pricing Creative higher value for Customer should consider the item’s worth
customer higher than its price
 1. Absorption Cost Pricing
Be able to 2. Accessible Premium Pricing
Maximizing Profit 1. Cash Flow Objective 37 match 3. Bundle Pricing
4. Captive Product Pricing
2. Contribution Pricing 18 Strategies 5. Capitation Pricing
to 6. Cost Plus Pricing
Maximizing Sales 7. Competitive Based pricing
Volume 3. Market Penetration 32 Objectives 8. Differentiation
9. Discount Pricing
10. Dynamic Pricing
4. Market Share Objective 11. Economy Pricing
Establishing a 12. Every Day Low Pricing (EDLP)
competitive position 13. Geographical Pricing
5. Partial Cost Recovery 14. Going Rate (Price Leadership)
15. Good Better Best
16. High Low Pricing
6. Profit Margin Maximization 26 17. Loss Leader
18. Marginal Cost Pricing
19. Multiple Pricing
7. Profit Maximization 26
20. Odd Even Pricing
21. On or Off Peak Pricing
22. Optional pricing
8. Quality Leadership
23. Penetration pricing
24. Predatory Pricing
9. Quantity Maximization 25. Pre-emptive Pricing
26. Premium pricing
27. Prestige Pricing
10. Revenue Maximization 28. Price Discrimination
29. Price Stabilization
30. Pricing Variations
11. Skimming 16 31. Product Line Pricing
32. Promotional pricing
12. Status Quo 33. Psychological pricing
34. Reference Pricing
13. Survival Pricing 18 35. Relationship Pricing
36. Skimming
14. Target Profit Pricing 26 37. Time Based Pricing
38. Value Pricing
15. Target rate of return

Part B Practicing the Math of Gross Profit, Mark-ups and Mark –Downs
1. A local clothing store buys a shipment of Oakley sunglasses for $79 per pair, and then resells
them for $115 per pair. Later in the season, the clothing store will put the glasses on sale for
$99. 34
a. What is mark up ($)?
$36
b. What is Mark Up % (on cost)? 45.57%
c. Calculate Gross Margin (Mark up on Selling Price)? 31.30%
d. What is Markdown $? $16
e. What is Markdown %? 13.91%

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 2. Sports Chek2 buys a pair of roller blades for $75 and prices them to realize a mark-up of $50.
The average operating cost to run a Sports Chek store is $1.1MM annually and roller blades
represents 2% of total store sales, and is allocated 2% of overhead costs as a result ($22,000).
a. What is selling price? $125
b. What is mark up ($)? $50
c. What is Mark Up % (on cost)? 66.66%
d. Calculate Gross Margin (Mark up on Selling Price)? 40%
e. How does this compare with Sporting Goods industry average 38%
gross margin?
f. How many roller blades does Sports Check store need to sell to 59459.45
make contribution of 3% net profit margin?
3. A co nvenience store buys 4 litre poly bags of milk for $4.99 and sells the m for $5.29.
a. What is mark up ($)? $0.3

b. What is Mark Up % (on cost)? 6.01%

c. Calculate Gross Margin (Mark up on Selling Price)? 5.67%

d. How does mark-up for milk compare with the average mark up for
convenience store (hint: convert gross margin benchmark to mark-
up)
e. Why do convenience stores sell milk if it has such a low gross
margin compared to their other products? (TIP: Use breakeven
with profit target)

4. A cat food manufacturer sells through wholesalers to retailers. A 10kg bag retails for $16.95.
Retail mark-ups are 35% and wholesaler mark-ups are 10%. What is the manufacturers selling
price? HINT: Two step process, first calculate Retailers cost, then Wholesalers cost =
Manufacturers Selling Price
Retail Selling Price $16.95
Retail Cost = Wholesaler Selling Price $12.56
Wholesaler Cost =Manufacturer Selling Price $11.41
Manufacturer Cost

PART C Mini-Case: HEINZ KETCHUP PRICING CASE

The Business Situation:

Heinz Ketchup developed a new line of spicy ketchup targeted to adult tastes. It had a benefit not available in any
other Ketchup on the market- its taste was a gourmet herb and spice blend with the original smooth thick tomato
texture of original ketchup.

The marketing plan is developed and price is the only thing yet to be decided.

2
In May 2011, Canadian Tire bought Sports Chek stores in Canada owned by Forzari Group for $771 MM (500 stores, total
$1.4B in sales annually. [With that information that means about $2.8MM in sales per store. Sporting goods retailers
benchmarks suggest they earn about 38% GM and 1.5% net profit on average (Retailer Owners Institute, 2008), so operating
costs per store about $1.1MM.

7
 Research:
Consumer research showed that the product had superior taste to the original and competitors. There was 85%
intent to purchase among adult ketchup users who represent about 15 % of the ketchup market volume. Total
Canadian Market is estimated at 5 million units.

The costs have been estimated. Competitive Comparisons with consumer perception
Competitive Comparisons
Costs for producing Spicy Ketchup Retail Market Consumer perceptions
Brand
price 1L share Texture Taste Value
Raw materials $.48 Heinz
2.99 50 % High High High
Packaging $.50 original

Direct Labour $.27 PC Brand 2.79 25% Med High High

Production overhead $ 100,000 No name 2.49 15 % Med Low Low

Administrative expenses $ 120,000 Hunts 2.79 10 % Med High Med

Advertising and promotion $ 500,000 Total 2.851 100%

Retail and Wholesale margin 20% Spicy
tbd tbd High High High
Ketchup
1
Average Retail Price (weighted average)

Your task:

Compare financial impact of four pricing strategies and make a When selecting pricing options, consider the following

pricing recommendation supported by financial facts. 1. What factors might Heinz consider in setting the price for this new
product? (Hint: 5 C’s of marketing)
2. How helpful is the market research provided in this case to evaluate
1. Select 4 pricing options that Heinz might consider for this 3.
alternative pricing strategies?
How elastic is the product category? Explain your answer providing
new product. For each pricing option, provide sales at least 4 drivers of elasticity.
4. How might market share forecasts be impacted by various pricing
forecasts and marketing mix assumptions. strategies?
2. Create and compare pro-forma income statements, ratio 5. How might Marketing Budget Estimates be impacted by various
pricing strategies?
and breakeven analysis for first year. Use Pro-forma 6. How might other elements of marketing mix be affected by pricing
decisions?
template provided. 7. This case is for the product manufacturer, so you need to be able to
3. Which retail price do you recommend for this product? calculate manufacturer selling price from the retail selling price
provided in the research.
Justify your recommendation using at least five financial 8. How significant do you think that cannibalization of existing product
might be (i.e. impact on Sales and Gross Profit on Heinz Original
facts from your pro-forma and analysis. Hint: product sales)?
Recommendations will depend on the business objective
that you assume.

The second strategy where the market share can be expected at 50% and the cannibalization is medium is the best
strategy. Reasons for selecting the strategy are:-

- High contribution margin at 42.92%.

- Highest net profit margins.

- Moderate gross margin (high gross margin can leave no capacity for fixed costs)

- Market share of 50% reducing cannibalization of brand’s other products

8
Part B Pro-forma template
Line
Assumptions Option 1 Option 2 Option 3 Option 4 Notes Item
Penetration pricing Competitive Pricing Price skimming Premium pricing
Price Strategy 1
$2.85 $3.15 $3.50 $3.85
Retail Price 2
$1.98 $2.19 $2.43 $2.67 (considering 20%
Manufacture Price margin each for 3
wholesaler & retailer)
Manufacturers' VC $1.25 $1.25 $1.25 $1.25
per Unit 4
Contribution per $0.73 $0.94 $1.18 $1.42
unit 5
Market Share 100% 50% 25% 10%
assumption 6
5,000,000 2,500,000 1,250,000 500,000
Forecasted units 7
Proforma Income statement
9,900,000 5,475,000 3,037,500 1,335,000
Sales Revenue 8
6,250,000 3,125,000 1,562,500 625,000
COGS 9
Gross 3,650,000 2,350,000 1,475,000 710,000
Profit/Contribution 10
500,000 500,000 500,000 500,000
Advertising Costs 11
220,000 220,000 220,000 220,000
Other Fixed Costs 12
720,000 720,000 720,000 720,000
Total Fixed Costs 13
2,930,000 1,630,000 755,000 -10,000
Net Profit 14
Analysis
36.87% 42.92% 48.56% 53.18%
Gross Margin 15
29.60% 29.77% 24.86% -7.49%
Net Profit Margin 16
986,302 765,958 610,170 507,043
Breakeven (in units) 17
19.73% 15.32% 12.20% 10.14%
BE Market Share 18
80.27% 84.68% 87.80% 89.86%
Margin of Safety 19
Advertising as % of 5.05% 9.13% 16.46% 37.45%
Sales Forecast 20
Cannibalization(high, High Medium Low Very Low
medium or low) 21

9
 Worksheet 3: Financial Analysis to Inform Decisions

1. Flags are Us is a small company producing flags. They are considering entering into this new market
where the maximum market size is estimated at 6,000 flags. The following are the costs for the
company, fixed costs are $4,000 and the variable costs are 8 cents per flag. The company feels they
can sell a flag for $3.00 each.
Show your work in a Proforma income statement format

a. Calculate contribution per unit?

$2.92
b. Calculate total fixed costs?
$4000
c. How many flags will need to be sold to
reach breakeven? 1370 units
d. What is market share at breakeven?
22.8%
e. How much profit would Flags are US make
at 50% market share? 4760
f. Do you think that there will be a lot of
competitors or only a few in this market? High CM, lot of competitors
g. Should this opportunity be pursued? In
order to answer this question, create pro-
forma's for a minimum and maximum sales
potential as well and compare forecasts
against breakeven.

Since contribution margin is high, profit can bbe achievedby reducing the price to gain higher sales. Hence, the opportunity should be pursued.

Option 1 Option 2 Option 3

Market Share Estimate BE 50% 10%
Unit Sales 1370 3000 600
Sales 4110 9000 1800
Variable Costs 109.6 240 48
Fixed Costs 4000 4000 4000
Net Profit 0 4760 -2248
Profit Margin 0 52.89% -124.89%
Breakeven 1370 1370 1370 Units
Margin of Safety 0 54.33% -128.33%

10
2. Madeleine’s Beauty Salon has been doing very well since it started 5 years ago. 2015 income
statement is provided below. Madeleine is planning on expanding the business to a larger location.
With the expansion she feels that the potential new revenue will increase by 15%. However, expenses
will also increase – rent will increase by $1,200 per month, one new employee at the cost of $2,000 per
month, additional costs for utilities of $50.00 per month and she would like to pay herself $500.00 a
month in salary for herself.
Show your work in a Pro-forma income statement format

2015 % of Expansion % of % Change over

(Base) Sales Sales Base
Sales $155,000 178,250 15%
COGS 38,000 24.52% 38,000 21.32% 0%
Gross Profit 117,000 75.48% 140,250 78.68% 19.87%
Fixed Expenses 85,000 54.84% 130,000 72.93% 52.94%

Net Profit 32,000 20.65% 10,250 5.75% -67.97%

Breakeven Sales with
Target Profit

a. Calculate contribution per unit?

b. Calculate total fixed costs after
expansion 130,000
c. What will net profit be for
expanded business? 10,250
d. How does percentage change in
net profit compare with change in
sales? 69.97%
e. Calculate % increase in $ sales
needed to earn same pre-
expansion profit after the
additional fixed expenses of
expansion? 18.77%
f. Is this a feasible move for her to
go through with her expansion
plans? Yes
g. What other things would you
suggest regarding this situation? Increase sales (by more than 19%) to cover the fixed cost incurred for
expansion.

11
3 A retailer purchased 100 new release computer games at a cost of $79.00 each. He was hoping to be able to sell
these during the pre-Christmas season at a 40% markup. He was targeting gamers that wanted to stay current
on their games and using a premium price as a result.

Show your work in a Pro-forma income statement format

a. Sales were much lower than forecasted and he only sold 60 units at the full mark up of 40%.
Because the next version of the game was scheduled for release in February, the retailer
wanted to clear the balance of his inventory of this game, so he marked down the price by
40% and was able to clear all his merchandise by the end of the year. How much profit ($)
did the retailer make on this product in the end? What was the gross margin?
Price 1 Price 2 Total
Selling Price 110.6 47.4 85.32
Quantity 60 40 100
Costs 79 79 79
Contribution Per Unit 31.6 -31.6 6.32
Mark up 40% 8%
Mark Down 40%
Sales 6636 1896 8532
COGS 4740 3160 7900
Gross Profit 1896 -1264 632
Gross Margin 28.57% -66.67% 7.41%
Note: Average Selling Price is NOT (P1+P2)/2

b. Instead of pricing it at a 40% markup, how much profit would he have made if he has priced
it more accessibly at a more modest 20% mark-up? And because of the price elasticity of the
demand for the product, he would have been able to sell the full quantity of 95 units.
Price 1 Price 2 Total
Selling Price 94.8 0 90.6
Quantity 95 5 100
Costs 79 79 79
Contribution Per Unit 15.8 -79 11.06
Mark up 20% 14%
Mark Down 100% 0
Sales 9006 0 9006
COGS 7505 395 7900
Gross Profit 1501 -395 1106
Gross Margin 16.67% 12.28%
Note: Average Selling Price is NOT (P1+P2)/2

c. Which pricing strategy would be better?

The second strategy would be better since it is leading to higher profit and gross margin.

12
4. MARS, maker of M&M's candy, recently introduced M&M Premiums. The new candies include flavors such as
mint chocolate, mocha, chocolate almond and raspberry almond with white chocolate. They are wrapped in
incandescent colors and sold in re-closable cartons. MARS also plans new offerings with its Snickers and Dove
brands. Although the new M&M Premiums will be able to charge a higher wholesale price ($0.48 per ounce
for the new product versus $0.30 per ounce for the original product), they also come with higher variable
costs ($0.35 per ounce for the new product versus $0.15 per ounce for the original product.

MARS is forecasting 300 million ounces of M&M Premium within the first year after introduction with an
increase in fixed costs of $5 MM during the first year of production of the new product.

Half of the forecasted M&M Premium sales will come from buyers who would normally purchase M&M
regular candies (cannibalized sales). The sales of regular M&M Candies are normally 1 billion ounces per year.
See Also: “Chocolate Confectionery in Canada”,Euromonitor International, Oct 2014,

Answer the following questions:

What growth strategy is MARS undertaking?

-Market Cannibalization

Will the launch of new product be successful? Give financial facts to support your answer. Show work using
Pro-forma.
Before After
MARS ONLY MARS Premium Total % Change
Quantity 1,000,000,000 850,000,000 300,000,000 1,150,000,000 15%
Price 0.30 0.30 0.48 0.35 15.65%
Contribution/unit 0.15 0.15 0.13 0.14 -04.04%
Sales 300,000,000 255,000,000 144,000,000 399,000,000 33%
Total Contribution 150,000,000 127,000,000 39,000,000 166,000,000 10.67%
Fixed Costs 5,000,000
Net Contribution 151,000,000
$ -

13
5. A retailer has $10,000 to spend on advertising and is deciding which product line to promote, deciding
between Product A or Product B.

With Product A, the manufacturer offers matching coop advertising3 of $10,000.

Product B is a private label and doesn’t have coop associated with it, but Product B is just now becoming very
popular and will benefit significantly from the advertising.

Which Product Line would you focus your marketing investment on? Give at least five financial facts to
support your answer. Use the pro-forma chart below to present your analysis.

Product A Product B
Before After Before After
Sales 160,000 220,000 36,000 120,000
COGS 80,000 110,000 14,400 48,000
Gross Profit/Contribution 80,000 110,000 21,600 72,000
Advertising - 10,000* - 10,000
Net Contribution to Profit 80,000 100,000 21,600 62,000
*Manufacturer for Line A offers $10,000 in coop advertising
$ change in Sales 60,000 84,000
% Change in Sales 37.5% 233.33%
Gross Margin % 50% 50% 60% 60%
Increase in Net Contribution$ 20,000 40,400
% Change in Contribution 37.5% 187.04%
Return on Marketing Investment 200% 404%
Breakeven ($)

3
Agreement between a manufacturer and a member of distribution chain (distributor, wholesaler, or retailer)
where the manufacturer shares the partner's advertising and promotion costs, either as a percentage of sales or
as a fixed sum.

14
 6. “City Hipsters” is a local clothing store specializing in cutting edge fashions for the 13-25 male and female
market. They have recently managed to get a great deal on a volume purchase of jeans. Each pair of jeans cost
them only $48.65, and they can sell them for $115.00 at full retail. They intend to use a consumer promotion to
sell all 500 pairs that they bought.

Here are the two options they're considering:

• Sweepstakes: They're considering giving away a weekend for four to Big White as the prize for a
'sweepstakes' promotion. Each purchaser of these jeans during the promotion would get one entry.
The cost of the prize would be about $1000 and the cost of printing the entry forms about $40.
• Premium: They're considering giving away a free belt with every pair of jeans sold. Their cost on the
belts they sell averages $10 each.

Use pro-forma income statement and breakeven analysis to compare the financial impacts of these two
options against a "base case" without any promotions. [Make your own chart this time!]

Answer these questions.

1. How much is their gross profit if they sell all 500 pairs of jeans without using a sales
promotion?
2. Which of the two sales promotion options would make them the most gross profit if they
sold all 500 pairs of jeans during the promotion? Explain.
3. Which of the types of sales promotion would allow them to make the most gross profit if
they sold only 100 pairs of jeans during the promotion? Explain.
4. Which sales promotion type would you recommend to them? Explain your answer
considering risk/reward trade-offs.
5. Which one of these do you think would drive the highest consumer interest and hence
sales? Explain.

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7. Games Galore

An analysis of the competition suggests that the average retail selling price of an electronic game is
$89.00. Games Galore store has an opportunity to purchase 5 dozen of these games at a delivered
price of $55.00 per unit. Their normal mark-up on games is 45%.

a. Should they make the purchase? Why or why not? (Give reasons to support your decision)
b. How does their normal markup and the “deal” mark-up compare against industry benchmark?
c. If you were the marketing manager for Games Galore, what pricing strategy would you
recommend? Explain your answer comparing the financial impact of alternatives. A template is
provided.

Current Option 1: Option 2: Option 3

Business At the Deal At the Deal Price reduction
(BASE) Keep Price Pass the saving to but maintain same
the same customer net profit
Quantity 60 60 60 60
Selling Price (Q*SP) $89 $89 $79.75
Variable Cost/unit $55 $55 $55 $55
Contribution $34 $34 $24.75
Total Sales $5340 $5340 $4785
COGS $3300 $3300 $3300 $3300
Gross Profit $2040
Mark-up % 45% 45%
Gross Margin* 38.20%
BE Profit Target
(units)
*Industry Hobby Toys and Games at 41.4% GM

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8. Widgets Manufacturing Ltd is now looking to the future and needs to make some adjustments to the
marketing mix and make some financial forecasting. Their widgets are currently selling for $7.65 and
100,000 units are being sold each year. They have asked you to help them make some decisions.

Scenario 1.

Widgets Manufacturing Ltd is thinking of investing $100,000 into R&D. This would lead to a new
product offering and would lead to 20,000 units being sold at $8.50 per unit in addition to existing
sales. The variable cost per unit of this new product is $3,00. This This would also increase
distribution costs by an estimated 5% to get the additional new product to market. Additional
advertising would be required for the new product and thus advertising expense would have to
increase by 20%. Should Widgets Manufacturing Ltd undertake the investment?

Scenario 2.

Widgets Manufacturing Ltd is thinking of investing $150,000 into R&D. This would lead to a new
product offering and would lead to 22,000 units being sold at $7.85 per unit in addition to existing
sales. The variable cost per unit of this new product is $3,00. This would also increase distribution
costs by an estimated 7% to get the additional new product to market. Additional advertising would
be required for the new product and thus advertising expense would have to increase by 25%.
Should Widgets Manufacturing Ltd undertake the investment?

NOTE:

Please use the attached Income and Expense Statement as your base.

2014
Sales 765,000
COGS 260,000
Gross Profit 505,000
Wages and Salaries 118,000
Delivery Costs 6,500
Legal fees 5,000
Advertising 25,000
Rent 12,000
R&D 50,000
Repairs and Maintenance 4,500
Insurance 2,300
Total Operating Expenses 223,300
Net Operating Profit 281,700
Depreciation 4,700
Tax 5,500
Net Profit 271,500

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 2014 Scenario 1 Scenario 2
Sales 7,65,000 935000 937700
COGS 2,60,000 320000 326000
Gross Profit 5,05,000 615000 611700
Wages and Salaries 1,18,000 1,18,000 1,18,000
Delivery Costs 6,500 6825 6955
Legal fees 5,000 5,000 5,000
Advertising 25,000 30000 31250
Rent 12,000 12,000 12,000
R&D 50,000 1,50,000 2,00,000
Repairs and Maintenance 4,500 4,500 4,500
Insurance 2,300 2,300 2,300
Total Operating Expenses 2,23,300 3,28,625 3,80,005
Net Operating Profit 2,81,700 2,86,375 2,31,695
Depreciation 4,700 4,700 4,700
Tax 5,500 5,500 5,500
Net Profit 2,71,500 2,76,175 2,21,495
Net Profit Margin 35.49% 29.54% 23.62%
Gross Profit Margin 66.01% 65.78% 65.23%
COGS Margin 33.99% 34.22% 34.77%
Return on Investment 4.68% -33.34%

Clearly, scenario 1 will lead to higher profits with lesser investments and higher return for the
organization.
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