Written Assignment 2 – Farris Chapter 3 – Margins and Breakeven Analysis
John has an idea for a new style of bicycle that he would like to introduce to the market.
The manufacturing cost of the bicycle is $100 including packaging and shipping to
wholesalers who will sell the product to retail stores. John’s fixed costs (as the
manufacturer and including all mass media advertising general administrative overhead)
are expected to be $2,500,000 for the entire planning period (3 years), including a
$1,000,000 advertising budget. No cost changes are anticipated over the planning period.
John anticipates providing his own sales agents with a 3% commission on each unit sold.
Competitors offer comparable bicycles for $500, and John feels the GPS system, backpedal brakes, and patented seat will give his produce competitive advantage. Typically,
bicycle wholesalers take a 25% margin (mark-up) on costs and retailers seek a 40%
margin on sales. John has set a profit goal of $1,000,000 for the planning period.
Answer the following questions for each retail price level listed: $400, $500, $600, $700
Questions
Units required for breakeven?
Sales revenue required for breakeven? $
Units required for financial goal?
Sales revenue required for financial goal? $
John’s unit contribution to profitability? $
John’s margin on costs? %
Wholesaler Margin ($) per unit
Retailer Margin ($) per unit
Retail Price to the End User
$400
$500
$600
$700
Please prepare answers for the following interpretative questions using your analyses
above, and retail, wholesale, manufacturing data about bicycles from the US Bureau of
the Census, and additional reputable data from Internet sources.
1. In the case description above, what are the fixed and what are the variable costs?
2. What would be a reasonable retail end-user price recommendation for John’s bicycle?
Justify your recommendation in market terms and in terms of John’s financial goal.
3. How many units must be sold with your price recommendation to achieve John’s
financial goal? Is this realistic given your data on the market?
4. Is John’s financial goal realistic? Justify your judgment in light of the data.
5. Given your retail price recommendation, how many units must be sold to achieve
John’s financial goal if he decides to give a $50 rebate as a new sales promotion to
the first 200 end-user purchasers. Would this be a good promotion idea? Why?
Assignment Solution
Questions
Retail Price to End User
$400
John’s Units Required For Breakeven
28,989
John’s Sales Revenue Required for Breakeven $5,565,888.00
John’s Units Required for Financial Goal
40,585
John’s Sales Revenue Required for Financial
$7,792,320.00
Goal
John’s Unit Contribution to Profitability
$86.24
John’s Margin on Cost%
81.54%
Wholesaler Margin ($) on Cost Per Unit
$48.00
Retailer Margin ($) on Sales per Unit
$160.00
Helpful Intermediate Calculations
Retailer Cost (What the retailer pays the
wholesaler)
Wholesaler Cost (What John charges the
wholesaler)
John’s Financial Goal
Salesperson Commission ($)
Total Variable Cost Per Unit
Given
Fixed Costs (including advertising and GAO)
John’s Desired Total Profit
Variable Costs
Manufacturing, Packaging, Shipping
Salesperson Commission
Wholesaler Required Margin on Cost %
Retail Required Margin on Sales %
$240.00
$192.00
$3,500,000.00
$5.76
$105.76
$2,500,000.00
$1,000,000.00
Note: Units must be rounded to next higher integer
because you cannot sell part of a bicycle.
$100.00
3.0%
25.0%
40.0%
500
600
700
