Contribution Margin. Income Statement. Channel Margins $ and % MKT300 Practice Problems Winter 2017 Prepared by: Larisa B. & Natalie L.

Transcription

1 *All problem scenarios in this workbook are fictional. This study aid I is not a comprehensive summary of the course material and is for extra practice only. Contribution Margin Contribution Margin (%) = Contribution Margin ($) x 100 OR = Contribution per Unit ($) Revenue ($) Selling Price per Unit ($) Contribution Margin per Unit ($) = Price per Unit Variable Cost per Unit Total Revenue=Price*Quantity Sold Total Costs=Fixed Costs + Variable Costs Contribution Margin is used to cover Fixed Costs. Refer to Breakeven. Income Statement Total Revenue=Price*Quantity Sold Gross Profit or Total Contribution=Total Revenue-COGS (Total Variable Costs) Net Profit= Gross Profit-Fixed Costs Net Profit Margin %= Net Profit/ Gross Revenue 1. Contribution Margin problems: 1.1 Ryerson Student Union is planning to host a big student party during the summer. In order to market the event they have printed out 500 posters for a cost of $400, 600 brochures for $300, and 3,000 tickets for $800. The marketing staff consisting of 5 people will be paid 200 each. They will also receive commission of $5 for each ticket sold. The design costs were $1,000 and production is $700. The union is planning to bring Drake on campus one more time and he is demanding $60,000 for his performance. The tickets will be sold for $150. a) What is total fixed cost of this event? b) What is total variable cost if all tickets are sold? c) What is contribution margin per unit ($)? d) What is contribution margin (%)? Channel Margins $ and % Margin in Dollars=Selling price-cost of good sold Given Markup %: Margin % = Margin $/Selling Price Margin%=Markup%/(1+Markup%) Selling Price = Cost of Goods Sold/(1-Margin%) Given Margin %: Margin%=Markup%/(1+Markup%) Markup%=Margin %/(1-Margin%) Mark-Up in Dollars=Selling price-cost of Good Sold Mark-Up % = Mark-Up $/Cost of Goods Sold Selling Price = Cost of Goods Sold*(1+Mark-Up%) Markup%=Margin%/(1-Margin%)

2 2. Margin and mark-up problems: 2.1 A manufacturer produces hot dogs and the cost of each is $0.90. The manufacturer sells the hotdogs to a wholesaler for a margin of 50%. Ryerson cafeteria purchases the hotdogs from the wholesaler, whose markup is 40%. At what price can you buy one hotdog at the Ryerson cafeteria if their mark-up is 100%? 2.2 Ryerson bookstore retails sweaters with the school logo for $60 each and has a margin of 30%. The book store purchases sweaters from a wholesaler whose mark-up is 20%. The wholesaler, in turn, buys the sweaters from a manufacturer whose margin is 15%. What is the manufacturer s cost of producing one sweater? 2.3 If Apple s mark-up for Mac Book Pro is 90%, what it their margin? 2.4 If Samsung s margin for Galaxy S7 is 60%, then what is their mark-up? Breakeven Breakeven in Units= Fixed Costs/ Contribution Margin/unit Breakeven in Sales= (Fixed Costs/ Contribution Margin %) Target Volume Target Volume (#) = (Fixed Costs ($)+Target Profits ($))/ Contribution Margin per unit ($) Target Revenue ($)= (Fixed Costs ($)+Target Profits ($))/ Contribution Margin % 3. Break-even and target volume problems: 3.1 P & G is developing a promotion for shampoo and wants you to calculate the breakeven in units and sales. The manager plans to give out a $2 coupon off the retail price. Each shampoo is sold at $9.99 at the store, and the retail margin is 20% of retail price. The cost to produce each bag are $2.00 and the estimated fixed costs for the promotion are $150,000. Calculate the breakeven in units and sales. 3.2 An ice-cream vendor wants to launch a new service, Slushes, in Toronto this summer. He plans to sell each slushy for $4.25. His variable costs are 45% of sales, license fees are $450, truck lease fees are $1800, labour is $6,000 and utilities is $1200. Calculate the breakeven in units and sales. 3.3 A biker decides to start making and selling bikes. His fixed costs are $10,000. His variable costs in materials and labor are $100. He sells the bikes for $200 to a local sports store that sells them for $250. He wishes to make a profit of $10,000. What volume of sales does he need? 3.4 A surfboarder decides to start making and selling surfboard. Her fixed costs are $30,000, and variable costs are $250. She sells the surfboards to a local sports store near the beach for $450. If her profit goal is $50,000, what is the target volume in units and dollar sales?

3 ROMI ROMI %= Return on Marketing Investment ROMI %= Incremental Revenue ($) * Contribution Margin (%) - Marketing Spending ($) *100 Marketing Spending ($) ROMI % based on Net Profit= Net Profit - Marketing Spending ($) *100 Marketing Spending ($) Incremental Revenue= 4. ROMI examples (1+ROMI) * Marketing Spending Contribution Margin % 4.1 You are managing an Inn with 50 rooms. You currently have an average occupancy of 60% and you charge people $100 per night. Cleaning costs $13 per room, and only the rooms that are used require cleaning. You are considering a renovation that has the potential to increase occupancy to 86%. This renovation will increase cleaning costs to $20 per room, however you plan to raise the price for each room to $130. The cost of the renovation is approximately $600,000. Assuming a one year implementation, calculate the ROMI on this investment. 4.2 You would like to implement a new back to school campaign. If students buy 2 binders they will get the next one for free. Each binder is priced at $30 and the cost to produce each binder $10. It will cost you $2000 to advertise the campaign and you will also need to bring in 2 extra staff at a cost of $120 per day. If the company requires a minimum 30% ROMI for any campaign, how much additional revenue will you need to generate to justify the campaign? ROIC Simple method Net Income-Dividends = Net Income-Dividends Total Capital 5. ROIC Examples: Long term debt+equity 5.1 You have outstanding debts of $45,000 and a shareholder s equity of $75,000. Your expenses for the coming year, excluding variable costs, will be $34,500. What must your gross profit be to maintain an ROIC of 12%? 5.2 Marco would like to know if his family owned business is earning a high return. The current Net Income for the business is $250,000, the dividends the company pays out amount to $30,000, and the total invested capital is $345,000. Calculate the ROIC.

4 Cannibalization Rate Cannibalization Rate= Sales lost from existing products (#,$) 6. Cannibalization Examples: Sales of new product (#,$) 6.1 A company has 4 lines of dog food. Total sales for the 4 lines last year was 100,000 units. The company would like to introduce a new organic line of dog food, which is estimated to sell 8000 units. The new line of dog food will reduce sales of the existing lines by 3000 units. What is the cannibalization rate? 6.2 Three companies compete in the Gluten-Free cracker market. Company A had sales of $250,000 and a market share of 25%. Company B had sales of $400,000 and a market share of 40%. Company C had sales of $350,000 and a market share of 35%. A new entrant, Company D, is expected to enter the market this year and is projected to generate $200,000 in sales. Approximately 25% of those sales are expected to come at the expense of the three established competitors. Using the fair share draw assumption, how much will each firm sell next year? Year on Year Growth Year on Year Growth % =Value ($,#,%) t - Value ($,#,%) t-1 Compound Annual Growth Rate Value ($,#,%) t-1 CAGR % = {[Ending Value ($,#,%) / Starting Value ($,#,%)] ^ [1/number of years]}-1 7. Growth Rate Examples 7.1 A hot dog stand near the Ryerson Library building has been on campus for 5 years and has had the following earnings: $2,000-1 st year; $3,500 2 nd year; $4,500 3 rd year; $4,000 4 th year; $5,500 5 th year. What is the year after year revenue growth? 7.2 Considering the information from the previous question, what is the compound annual growth rate between year 1 and 5? Price Elasticity for Linear Demand Price elasticity of demand= (% change Q) (% change P) Price elasticity of demand= (Q2-Q1)/Q1 (P2-P1)/P1 Price elasticity of demand= (Q2-Q1) * P1 (P2-P1) Q1 Price elasticity of demand= Slope* P1 Q1

5 Price Change Analysis For price decrease use Increase in Sales Formula=q% = p%/(cm% - p%) For price increase Decrease in Sales Formula=q% = p%/(cm% + p%) Alternatively, you can use Price Change Analysis Excel spreadsheet. 8. Price elasticity and analysis examples 8.1 Assume that elasticity of demand for IPhone 7 is 0.2. If Apple decides to increase price for the IPhone by 20%, what will their change in sales be? 8.2 The owner of the hot dog stand at Ryerson decides to increase revenue by increasing the price of hot dogs from $4 to $5.Price elasticity for hot dogs is 0.6. He knows from previous experience that with this price increase his sales will drop from 100 to 89 customers per day. Variable cost to make a hotdog is $1. Is this price increase worthwhile? What is maximum drop in sales the owner should accept in order to keep his contribution margin? Brand Development Index BDI = (Brand Sales to Group/Total customers in the group)/(total Brand Sales/Total Customers) 9. BDI examples: 9.1 Starbucks wants to know its brand development index in Toronto among the group of females between ages of 18 to 25. The sales to this group are 1.5 million, while total number of customers in the group is 2 million. Starbucks has a total of 3 million brand sales and 5 million total customers in Toronto. What is Starbucks BDI?

6 Solutions 1.1 a) Total Fixed Cost = $400 + $300 + $ * , ,000 = 64,200 b) Total Variable Cost = $5*3,000 = 15,000 c) Contribution Margin ($) = 150 (15,000/3,000) = 145 d) Contribution Margin (%) = 145/150 = = 96.67% 2.1 Manufacturer s selling price = 0.90/(1-0.5) = $1.8 -> Wholesaler s cost Wholesaler s selling price = 1.8*(1+0.4) = > Cafeteria s cost Cafeteria s selling price = = 2.52*(1+1) = = Wholesaler s price/(1-0.3) => Wholesaler s price = 60*(1-0.3) = = Manufacturer s price*(1+0.2) => Manufacturer s price = 42/(1+0.2) = = Manufacturer s cost/(1-0.15) => Manufacturer s cost = 35*(1-0.15) = Margin = 0.9/(1+0.9) = = 47.37% 2.3 Mark-up = 0.6/(1-0.6) = 1.5 = 150% 3.1 FC = $150,000 VC = $2 + $2coupon + ($9.99*0.2) Price = $9.99 BE= $150,000/ ($9.99-$5.99) = 37,500 units or (* $9.99) = $374,625 sales 3.2 BE= ($450 + $ $ $1200) / [$ ($4.25*0.45)] = 4941 units or (*$4.25) = $21, Target Volume = (FC + Target Profit)/(Price-variable cost) = ($10,000 + $10,000)/($200-$100) = Target Volume= ($30,000 + $50,000) / ($450-$250)= $400 or (*$450) = $180, % * 50 = 30 rooms rented per day 30 * ($100-$13) = $2610 per day revenue 86% * $100 = 43 rooms rented per day after reno 43 * ($130-$20) = $4730 per day revenue after reno Incremental Revenue per day = = $2120 Total Incremental Revenue for the year = $2120 * 365 days per year = $773,800 Contribution Margin ($) = $130 - $20 = $110 Contribution Margin (%) = $110/$130 = 84.62% ROMI = ($773,800 * 84.62% - $600,000) / $600,000 = 9.13% 4.2 Price = $30 * (2/3) = $20 revenue for each binder (receiving 3 binders for the price of 2 binder) CM = ($20-$10)/$20 = 50% IR = [( ) * ($ ($120*2)] / 0.5 = $ Total Capital = $45,000 + $75,000 = $120,000 ROIC * Total Capital = Net Income = 0.12 * $120,000 = $14,400 Gross Profit = Net Income + Total Expenses = $14,400 + $34,500 = $48,900

7 5.2 ROIC = ($250,000 - $30,000) / $325,000 = 67.7% /8000=37.5% 6.2 Capture of sales= (0.25) * $200,000 = $50,000 The breakdown of that $50,000 will be proportional to the shares of the current competitors: 25% * $50,000 = $12,500 will come from Company A 40% * $50,000 = $20,000 will come from Company B 35% * $50,000 = $17,500 will come from Company C Therefore the projected sales and market shares next year of the four competitors are; Company A = $250,000 - $12,500 = $237,500 Company B = $400,000 - $20,000 = $380,000 Company C = $350,000 - $17,500 = $332,500 Company D = $200,000 Total Expected Sales for next year = $1,150,000 Company A Market Share = 21% Company B Market Share = 33% Company C Market Share = 29% Company D Market Share = 17% st to 2 nd year growth = (3,500-2,000)/2,000 = 75% 2 nd to 3 rd year growth = (4,500-3,500)/3,500 = 28.6% 3 rd to 4 th year growth = (4,000-4,500)/4,500 = -11% 4 th to 5 th year growth = (5,500-4,000)/4,000 = 37.5% 7.2 CAGR = {[5,500 / 2,000] ^ [1/4]} -1 = = 28.78% 8.1 %Change in Q = 0.2*20% = 4% 8.2 %change in Price = (5-4)/4 = 25% Current contribution margin (%) = (4-1)/4 = 75% Maximum decrease in sales =.25/( )= 25% Actual change in sales = (89-100)/100 = -11% Actual decrease in sales is smaller than the maximum decrease in sales the owner should accept to keep his contribution margin. Therefore this price increase is worthwhile because the contribution margin will increase. 9.1 BDI = (1.5/2)/(3/5)=1.25