Given:
Jay Letterman has just (year: 2012) become product manager for Avenir. Avenir is a consumer product with a unit retail price of $1.00. Retail margins on the product are
33%, while wholesalers take a 12% margin.
Avenir and its direct competitors sell a total of 20 million units annually; Avenir has 24% of this market.
Variable manufacturing costs for Avenir are $0.09 per unit. Fixed manufacturing costs are $900,000.
In 2012, the advertising budget for Avenir was $500,000. The Avenir product
manager's salary and expenses total $45,000. Salespeople are paid entirely by a 10% commission. Shipping costs, breakage, insurance, and so forth are $0.03 per unit.
EXERCISES
1. What is the unit contribution for Avenir?
Using Unit contribution = selling price - variable price is the correct answer:
$0.41
2. What is Avenir's break-even point?
Is the correct answer: 3,524,391 units
3. What market share does Avenir need to break even?
Is the correct answer: 17.62%
4. What is Avenir's profit impact?
Is the correct answer: $523,000
5. In 2013, Industry demand/potential is expected to increase to 24 million units.
Jay Letterman is considering raising his advertising budget to $1.5 million to
capture a larger portion of this increased demand.
a. If the advertising budget is raised, how many units will Avenir have to sell
to break even?
Is the correct answer: 5,963,415 units I used the formula fixed cost / unit contribution and did this similar to question 2 but changed the advertising cost.
To calculate the unit contribution for Avenir, you need to subtract the variable costs from the selling price. In this case, the selling price is $1.00 and the variable manufacturing cost is $0.09.
Unit contribution = Selling price - Variable cost
Unit contribution = $1.00 - $0.09
Unit contribution = $0.91
So the unit contribution for Avenir is $0.91.
To calculate the break-even point for Avenir, you need to divide the fixed costs by the unit contribution. The fixed manufacturing costs are $900,000.
Break-even point = Fixed costs / Unit contribution
Break-even point = $900,000 / $0.91
Break-even point = 3,524,391 units
So the break-even point for Avenir is 3,524,391 units.
To calculate the market share Avenir needs to break even, you need to divide the break-even point by the total market size. The total market size is 20 million units and Avenir has a 24% market share.
Market share to break even = Break-even point / Total market size
Market share to break even = 3,524,391 units / 20,000,000 units
Market share to break even = 0.1762 or 17.62%
So Avenir needs a 17.62% market share to break even.
To calculate Avenir's profit impact, you need to multiply the unit contribution by the number of units sold. Avenir sells 20 million units and has a unit contribution of $0.91.
Profit impact = Unit contribution * Number of units sold
Profit impact = $0.91 * 20,000,000
Profit impact = $18,200,000
So Avenir's profit impact is $18,200,000.
In 2013, if Avenir raises its advertising budget to $1.5 million, you can calculate the new break-even point by substituting the new advertising cost in the break-even point formula. The fixed costs remain the same.
New break-even point = Fixed costs / (Unit contribution - Advertising cost)
New break-even point = $900,000 / ($0.91 - $1.50)
New break-even point = $900,000 / -$0.59
New break-even point ≈ -1,525,424 units
However, it is not possible to sell a negative number of units. Therefore, Avenir will not be able to break even with this new advertising budget.
So the answer for question 5 is that Avenir will not be able to break even if it raises its advertising budget to $1.5 million.