MKT 300 Quiz 2 - Prof: Matthew Phillip PDF

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Prof: Matthew Phillip...

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Question 1 You are managing a camping grounds in Muskoka, with 200 bunkers available for rent. Over a given month, you currently average 70% occupancy per day (i.e., on average, 70% of the rooms are rented), and people pay $110 per night. Your main variable cost is room cleaning – it costs, on average, $12 per room cleaning, but you only need to clean rooms that are rented.

You believe that by renovating the camping grounds, you could increase the average occupancy rate to 80% and charge more for each bunker: $150 per night. However, you would drop to 180 rooms and the planned renovations would require additional cleaning services, raising the cost to $18 per bunker. The total cost would of the renovations is estimated at $1,280,000. What would the ROMI be on this investment, assuming a one-year implement at -73% -51% 51% The correct answer is not listed 15% Hide Feedback

70% x 200 = 140 rooms rented per day 140 x ($110 - $12) = $13,720 per day revenue

80% x 180 = 144 rooms rented per day 144 x ($150 - $18) = $19,008 per day revenue Incremental Revenue per day: $5,288

Total Incremental Revenue = $5,288 * 365 = $1,930,120 Since we have already accounted for margin above, then we have: ROMI = (Incremental Revenue – Cost) / Cost = ($1,930,120 - $1,280,000) / $1,280,000 = 50.79%, or 51% Question 2

You are considering two marketing campaigns. You believe that Campaign 1 would generate incremental revenues of $63,000, at an incremental cost of $6,000 and a contribution margin of 22%. You predict that Campaign 2 would generate incremental revenues of $85,000, at an incremental cost of $12,000 and a contribution margin of 30%. If you are basing your decision solely on ROMI, which campaign should you choose? The ROMI is not calculable Campaign #1 Both campaigns are equivalent Campaign #2 Hide Feedback

To solve this question, you need to calculate the ROMI for each campaign. Campaign 1: Incremental Revenue = $63,000 Costs: $7,000 CM% = 22% ROMI = ((Incremental Revenue X CM%) - Marketing Costs) / Marketing Costs ROMI = (($63,000 X 22%) - $6,000) / $6,000

ROMI = $13,860 - $6,000) / $6,000 ROMI = $7,860 / $6,000 ROMI = 131.0%

Campaign 2: Incremental Revenue = $85,000 Costs: $12,000 CM% = 30% ROMI = ((Incremental Revenue X CM%) - Marketing Costs) / Marketing Costs ROMI = (($85,000 X 30%) - $12,000) / $12,000 ROMI = $25,50 - $12,000) / $12,000 ROMI = $13,500 / $12,000 ROMI = 112.2%

Since the ROMI is higher for campaign 1 (131.1%) vs. campaign 2 (112.2%), you should go with campaign 1 Question 3 You are considering two marketing campaigns. You know from experience that the first option will generate approximately $45,000 in additional revenue at a cost of $7,500, with a contribution margin of 25%. A colleague recently suggested an alternative campaign that would likely generate a 60% ROMI, generating $62,500 in additional revenue, but costing $12,500. What would the contribution margin need to be in order to make this alternative viable? 32% 45% 25% 40% 30%

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To solve this question, you need to calculate the contribution margin for the second campaign, and you can ignore the first part of the question. Campaign 2: Incremental Revenue = $62,500 Costs: $12,500 CM% = ??% ROMI = 60% ROMI = ((Incremental Revenue X CM%) - Marketing Costs) / Marketing Costs Rearrange the formula to solve for CM%: Step 1: Bring the Marketing Costs from the denominator on the right, the the left side of the equation: ROMI X Marketing Costs = (Incremental Revenue X CM%) - Marketing Costs Step 2: Bring the Marketing Costs from the right, and add it to the left side of the equation: (ROMI X Marketing Costs) + Marketing Costs = Incremental Revenue X CM% Step 3: Now you can bring the last variable from the right, Incremental Revenue, to the left side of the equation leaving you with CM%, which your are trying to solve: ((ROMI X Marketing Costs) + Marketing Costs) / Incremental Revenue = CM% Now, you can substitute in the values we have, and solve for CM%: CM% = ((60% X $12,500) + $12,500) / $62,500 CM% = ($7,500 + $12,500) / $62,500 CM% = $20,000 / $62,500 CM% = 32% 1. You are running a business that sells winter outerwear. Your monthly lease on the space is $2900.

Question 4 This past week, you sold 320 hats for $8.25 each (they cost you $4.25 each), 200 jackets for $120.99 per jacket (they cost you $60 each), 160 pairs of boots at an average price of $60.99 (your cost: $30), and 56 pairs of mittens at an average price of $30.95 (your cost: $20). Over the course of this week, you paid 4 part-time employees $8 per hour, and they each worked 15 hours. You also pay a full-time manager, who is on salary, $39,000 per annum. As Winter was quickly approaching, you ran a special flyer that cost you $1500 to print and deliver. Your electricity bill averages out to $780.00 per month, and you also employ the services of an accountant four times a year to manage books and do taxes, at a cost of $5,200 per year. Assuming no taxes come into play, what is your net income for the week? $15,875.25 $15,208.83 $17,577.33 The correct answer is not listed $9,586.29 Hide Feedback

Total Expenses: Fixed: (3,840.77) Variable: ($19,280) Total: $23,120.77 Hats 320 * 8.25 = 2,640 Jackets 200 * 120.99 = 24,198 Boots 160 * 60.99 = 9,758.40 Mittens 56 * 30.95 = 1,733.20

For a total of $38,329.60 Then, to figure out the Net Income, we subtract the total expenses from the revenue: Net Income = Revenue – Expenses = $38,329.60 - $23,120.77 = $15,208.83 Question 5 You are running a business that sells office supplies. Your monthly lease on the space is $3600. This past week, you sold 820 rulers for $1.25 each (they cost you $0.25 each), 900 reams of paper at for $7.99 per ream (they cost you $4 each), 172 computers at an average price of $674.99 (your cost: $497), and 86 printers at an average price of $109.95 (your cost: $89). Over the course of this week, you paid 4 part-time employees $8 per hour, and they each worked 20 hours. You also pay a full-time manager, who is on salary, $41,600 per annum. As it was back-to-school time, you ran a special flyer that cost you $1700 to print and deliver. Your electricity bill averages out to $758.33 per month, and you also employ the services of an accountant four times a year to manage books and do taxes, at a cost of $5400 per year. What are your total fixed costs for the week? The correct answer is not listed $7,489.76 $4,458.23 $4,249.62 $4,319.21 Hide Feedback

To solve this question, we need to first identify our fixed costs. The products we sold (e.g., printers, rulers, etc.) are all variable costs, since the total changes depending on how many we sell. The lease, salaries, promotions, and utilities are the fixed costs, since we pay them regardless of whether we sold 1 product or 1,000 products. If we read the question carefully, then we should note that it is asking for the weekly total, but some of the values are monthly or annual (or one-time expenses, like the flyer). So, we need to convert any non-weekly values to this unit of measurement. You cannot divide a monthly expense by 4 (i.e., assume 4 weeks in a month), although this is a common approach, since it would end up representing only 48 weeks in a year (there are 52). To convert monthly expenses to weekly, we first multiply by 12 (number of months in a year),

and then divide that annual value by 52 (number of weeks in a year). To convert an annual expense to weekly, we divide the expense by 52 (number of weeks in a year). This gives us: Lease: $3600 * 12 months (43,200) / 52 = $830.77 Part-time employees: 4 x $8 per hour x 20 hours = $640 Manager: $41,600 p.a. / 52 = $800 Flyer: $1700 Electricity Bill (operating expense): $758.33 * 12 months (9099.96) / 52 weeks = $175 Accountant: $5400 / 52 = $103.85 For a total of $4,249.62 Question 6

Fashion Pro currently manufactures their novelty t-shirts for a contribution margin of 71%. With a sales revenue of $748,992, their fixed costs require 42% of their sales. They have signed with a new company that can produce their shirts, increasing their contribution margin to 76%. How will this change their net profit margin, assuming the sales revenue does not change? Grows by 5% from 29% to 34% Shrinks by 5% from 39% to 34% The correct answer is not listed Grows by 5% from 24% to 29% Shrinks by 5% from 34% to 29% Hide Feedback

Slow Solution: Profit margin = Net Profit / Total Revenue So, we need to figure out our net profit. To do so, we take our total revenue and subtract the variable costs and the fixed costs. Fixed Costs = 42% of revenue = 0.42 x $748,992 = $314,576.64 We now need to figure out our variable costs under both conditions. If our initial contribution margin is 71%, then we can do this. If you recall, the CM% is the amount left over after covering variable costs, to cover fixed costs and profit. Therefore, our variable costs are the

inverse of the CM% (100-71% = 29%). Thus, our variable costs initially are: 0.29 x $748,992 = $217,207.68. And in the new case, they are: 0.24 x $748,992 = $179,758.08. So, Net Profit = $748,992 (Total Revenue) - $217,207.68 (original VC) - $314,576.64 = $217,207.68 Profit Margin = $217,207.68 / 748,992 = 29% And the new Net Profit = $748,992 (Total Revenue) - $179,758.08 (new VC) - $314,576.64 = $254,657.28 Profit Margin = $254,657.28 / 748,992 = 34% Fast Solution: Since the question gives us the key information (costs) in percentages, we don’t actually need to calculate the dollars. If we understand that the contribution margin is the amount left over after removing variable costs, which is the same as gross profit, then we have the following: Situation #1: 71% (contribution margin) – 42% (fixed costs) = 29% Net Profit Margin Situation #2: 76% (contribution margin) – 42% (fixed costs) = 34% Net Profit Margin

Question 7 Ace Shoe Company sells heel replacement kits for men's shoes. It has fixed costs of $6 million and unit variable costs of $5 per pair. Suppose a consultant tells Ace it can sell 700,000 heel repair kits, what price must it charge to achieve a profit of $2.5 million? $17.90 $12.15 $17.14 $7.58 None of these are correct Hide Feedback

Use the Target Volume formula and solve for price. Let P stand for price.700,000 = [2,500,000 + 6,000,000]/[P - 5] P = $17.14

Question 8 A marketing manager for Kraft developed a direct mail marketing campaign to increase sales of Kraft Dinner. The following are the costs associated with the campaign. The prospect list cost $22,000, creative costs $18,000, total mailing costs were 40,000, each can of Kraft Dinner costs 75 cents. Included in each direct mail piece was a coupon for 49 cents off the retail price of Kraft Dinner. The Kraft Dinner retails for $5.99 without the coupon. Half of the net retail price goes to channel partners the other half to Kraft . How many customers must purchase a case to Breakeven on the direct mail campaign? Assume all customers use the coupon. 25,000 27,692 30,000 45,846 None of these are correct Hide Feedback

Fixed costs: 

Prospect list cost $22,000

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Creative costs $18,000

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Mailing costs $40,000

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Total fixed costs $80,000

Variable cost: 75 cents/unit Selling Price: $5.99 (without coupon). Coupon value: 49 cents

Selling Price: $5.99- $0.49 = $5.50 (with coupon, net) "Half of the net retail price goes to channel partners, the other half to Kraft" >>> selling price for Kraft is $2.75 ($5.50/2) Break even volume = fixed costs/contribution margin = fixed costs/ (selling price- variable cost) Break even volume = $80,000/($2.75 - $.75) Break even volume = 40,000

Question 9 Calculate the monthly Target Volume for the following: A Flower shop owner has monthly costs consisting of $500 in real estate taxes, $1200 interest on a bank loan, and $1800 in other fixed expenses. She would like to earn a $1000 profit each month. She sells her flowers for $25. The variable costs are $5 for materials, $2 for labour and $3 for delivery. 180 None of these are correct 300 666.6 234 Hide Feedback

The Target Volume is calculated as (Fixed costs+Target Profit)/ (price-unit variable costs) Fixed Costs= 3,500 Target Profit=$1000 $4,500/($25- $10) =300 units

Question 10 Calculate the monthly Break-even volume for the following: A Flower shop owner has monthly costs consisting of $350 in real estate taxes, $1450 interest on a bank loan, and $2,200 in other fixed expenses. She would like to earn a $1000 profit each month. She sells her flowers for $35. The variable costs are $5 for materials, $7 for labour and $3 for delivery. None of these are correct 200 280 436.60 320 Hide Feedback

The Break-even Volume is calculated as (Fixed costs)/ (price-unit variable costs) Fixed Costs= 3,500 $4,000/($35- $15) = 200 units...