Case Scenario:
Peter, the marketing manager of ABC Inc., is trying to figure out the economics for a new line of disposable plastic electric shavers that his firm is thinking of introducing next year. He plans to sell the shavers to the ultimate consumers at a price of $54 each. As a general rule, the wholesalers keep a margin of 20% on their cost and the jobbers (who act as middlemen between the wholesaler and retailer) keep a margin of 20% on their selling price. The retailers expect a margin of 20% on their cost price. The shavers are manufactured out of plastic sheets, and $120 of the raw material is enough to produce two dozen shavers. Other parts that go into the shaver cost $3.80 per shaver and the direct labor is $2.50 per shaver. ABC will hire 10 salespersons. Each of them will be paid a fixed annual income of $20,000 and in addition they will get a commission of 5% on the selling price to consumers for each sale. ABC also plans an advertisement budget of $200,000 for the year. Administrative expenses are expected to be $100,000 and total travel costs estimated as another $140,000. ABC has spent $320,000 on research and development of the product. Peter has found out that there are 1.0 million men in the area who uses disposable shavers. He has also estimated that out of these there are only 40% who can afford electric shavers. As a general policy his firm expects a 10% annual return on investment. The total investment for this project is $10.4 million.
Problem 1. What is the contribution per shaver for ABC Inc.?
Problem 2. What will be ABC Inc's breakeven sales volume in number of units and in dollars?
Problem 3. What will be ABC Inc's breakeven market share?
Problem 4. What market share will be necessary to meet the company ROI objective?
Problem 5. Peter is considering eliminating the jobber and increasing the wholesaler's margin to 35% and the retailer's margin to 25% of their respective cost price. He believes that ABC will get greater support for their new product if this strategy is implemented. How will the answers to questions (1) through (4) be affected if this strategy is implemented? (Strategic alternative 2)
Problem 6. Peter is also considering reducing the final consumer price by 20%, eliminating the jobber, and paying a margin of 20% to wholesalers and retailers on their respective cost price. What will the breakeven volume be if this strategy is implemented. What market share will be necessary to meet the ROI objective? (Strategic alternative 3)
Problem 7. Which of the three strategies would you recommend and why? Consider quantitative factors such as breakeven market share and other qualitative factors such as quality of coverage, impact on demand, influence of retailers on consumer choice decisions, etc.
Problem 8. Peter's boss, Elaine indicates that reducing the final price by 20% might affect the quality perceptions of the new line of razors but eliminating the jobber poses no problem. She wants Peter to consider another alternative. Since the retailers are very powerful, ABC cannot risk alienating them. Therefore, ABC could pay them 25% margin on their cost while negotiating with the wholesalers about the acceptable margin. Before the negotiations can begin, however, Peter needs to find out the maximum possible margin on the wholesaler's cost price that ABC could offer, assuming that the consumers would pay $54 per shaver. Elaine has indicated that ABC must operate at a breakeven volume of 32,000 units.