Question

# You might be familiar with Crazy Eddy, an owner of the “Crazy Eddy’s” home electronics stores...

a.) (4 points) On what number of skier days did Joe feel they should base the breakeven market share calculations? (Just a number of skier days.)

b.) (6 points) Why did Joe think Eddy was using the wrong number of skier days for their specific ski area’s break even and who do you think was right, Eddy or Joe? Justify your answers.

The next morning Joe was called into Crazy Eddy’s office, and Eddy, true to his namesake, was flipping out. Crazy Eddy said “Joe these percentages don’t make any sense at all! First, you gave me four different market share measures that don’t match exactly and then you tell me we should use the larger market share numbers of each type (units and dollars) to base our breakeven on. You’d better start making some sense or you’re fired!”

c.) (20 points) What were the four break-even market shares (Two Unit Share calculations, Two Dollar Share calculations. One of each for Joe’s market Size and Eddy’s Market size) that Eddy had received from Joe? Please show your work.

d.) (3 points) Should Joe be concerned that the two market shares percentages (unit and dollar shares) do not exactly match for either his market or Eddy’s market? Why? Disaster was avoided for Joe. He finally made Eddy see things his way (for right of for wrong). Then however Eddy came up with a “great” idea. He figured that with all the business that they were bound to have a need for some slope side accommodations (at the mountain). “We might need to skimp a bit on making the trails as nice as they can be with our manpower, but I think this hotel is it.” He figured the fixed cost of the 150 room hotel (Maximum capacity of 750 people in any one night) would cost another \$1,950,000 of fixed cost plus \$10 of variable cost per ROOM per night. Rooms would be \$100/night regardless of the number of people. Eddy figured he could fill 140 rooms a night for the ski season from about December 11th to April 30th (assume this season length is reasonable and 150 days long) each year. Eddy also wanted to spend another \$50,000 (in addition to the \$1,950,000) to advertise the hotel, figuring that would give him an advantage over some of the other resorts. Joe replied “Forget the financial issues which I can’t calculate in my head, this plan has a major issue with each of Dolan’s 5Cs! I don’t think that is a good idea at all.”

e.) (15 points) For EACH of the 5C’s explain at least one thing with which Joe had an issue. Eddy replied, “I only take financial arguments seriously. If my assumptions about occupancy rates and costs are correct, we should make a ton of money on this, right?” Joe was reluctant to bother with this in light of his reservations to the strategy of the problem, but he agreed.

f.) (7 points) Did Joe find support for the financial side (that is would there be an overall profit for the hotel assuming it had no affect on the ski ticket sales or the cost structure of the ski area operations) of this hotel idea in the absence of his strategic reservations with Eddy’s estimated number of rooms filled per night? Please justify your answer with a calculation.

Bonus Questions :

1. (2 points) We talked about financial motivations for distributors in some of the cases discussed in class. Besides price and percent mark-up or margin, what two other factors directly influence the financial motivation (i.e. total profit) of a channel partner (wholesalers, retailers, etc.) who carries a new product?

2. (3 Points) Eddy decides to sell packs of chewing gum at the ski lodge. He buys the gum in bulk from Yummie’s candy (a wholesaler) for \$.50 per pack. If Eddy sells each pack with a 75% margin for himself what is the retail price (to a consumer)?

3. (3 Points) If Yummie’s sold the gum to Eddy at \$.50 a pack, and which included a 50% Mark-up above the manufacturer’s selling price to them, what is the manufacturer’s selling price?

This question can be broken up into 10 Posted answered questions if need be.

(a) On what number of skier days did Joe feel they should base the breakeven market share calculations?

7 MM Skier Days - the amount of the smaller portion of the market held by smaller mountains.

(b) Why did Joe think Eddy was using the wrong number of skier days for their specific ski area’s break even and who do you think was right, Eddy or Joe? Justify your answers.

Joe did not think they should use the full 10 million (what Eddy wanted to use) as 30 percent of the market would only ski at destination resorts and the market would be perfectly segmented. Joe felt that the 7 Million Skier days would be a better number to base calculations on, because it represents the total number of skiers who would consider skiing on a smaller mountain (of which they are one). Joe was more right, as they had little hope of attracting the other 30 percent who only skied in the other "resort" mountains

The next morning Joe was called into Crazy Eddy’s office, and Eddy, true to his namesake, was flipping out. Crazy Eddy said “Joe these percentages don’t make any sense at all! First, you gave me four different market share measures that don’t match exactly and then you tell me we should use the larger market share numbers of each type (units and dollars) to base our breakeven on. You’d better start making some sense or you’re fired!”

(c) What were the four break-even market shares (Two Unit Share calculations, Two Dollar Share calculations. One of each for Joe’s market Size and Eddy’s Market size) that Eddy had received from Joe? Please show your work.

Unit Contribution (UC) = SP – VC = \$42 - \$19 = \$23

Total Fixed Cost = \$7MM

Breakeven Units = Fixed Cost / UC = 304,348 Units (Skier Day Tickets)

Or Breakeven Sales of : B/E Units * SP = 304,348*\$42 = \$12,782,609

Eddy:

So For 10MM Skier Days:

B/E Units Market Share

304,348 / 10MM = 3.04%

B/E Sales Share:

Total Market = 3MM *\$51 + 7MM*24 = \$321MM

B/E Share = \$12,782,609/\$321MM = 3.98%

Joe:

For 7MM Skier Days Market:

B/E Units Market Share

304,348 / 7 MM = 4.3%

B/E Sales Share:

Total Market = 7MM*24 = \$168 MM

B/E Share = \$12,782,609/\$168 MM = 7.6%

There is another acceptable way to calculate this that can get credit:

\$51/day (for the big areas) X 3MM Skier Days = \$153MM

The case says this is 48% of the market dollars: 153MM/.48 = \$318.75MM

Or

\$24/day (for small areas) X 7 Million skier days = 168 MM

With 52% of the \$ value = \$323.08 MM

Either of those is acceptable for full credit.

(d) Should Joe be concerned that the two market shares percentages (unit and dollar shares) do not exactly match for either his market or Eddy’s market? Why?

No. Dollar share and unit share do not necessarily have to match. They both tell you slightly different things and won’t be exactly the same unless every competitor has the same price (or very close). The pricing was widely varied, so this would suggest different market share results.

Disaster was avoided for Joe. He finally made Eddy see things his way (for right of for wrong). Then however Eddy came up with a “great” idea. He figured that with all the business that they were bound to have a need for some slope side accommodations (at the mountain). “We might need to skimp a bit on making the trails as nice as they can be with our manpower, but I think this hotel is it.” He figured the fixed cost of the 150 room hotel (Maximum capacity of 750 people in any one night) would cost another \$1,950,000 of fixed cost plus \$10 of variable cost per ROOM per night. Rooms would be \$100/night regardless of the number of people. Eddy figured he could fill 140 rooms a night for the ski season from about December 11th to April 30th (assume this season length is reasonable and 150 days long) each year. Eddy also wanted to spend another \$50,000 (in addition to the \$1,950,000) to advertise the hotel, figuring that would give him an advantage over some of the other resorts.

Joe replied “Forget the financial issues which I can’t calculate in my head, this plan has a major issue with each of Dolan’s 5Cs! I don’t think that is a good idea at all.”

(e) For EACH of the 5C’s explain at least one thing with which Joe had an issue.

Company: It is unclear that your company has any expertise at all. It has done little research on the hotel accommodations in the area and probably will not have a great management plan. It should be more focused on the things that matter (like ski slope conditions than the hotel, especially with the limited manpower.

Customers: Your customers don’t care at all about accommodations there is no point to the investment. If you are not making the trail conditions as good as they can be, you are not serving them as well as you can.

Collaborators: You will be taking business away from your ski rental supplier this will likely upset him greatly and could cause relationships to sour. This could lead him to leave at the end of the season.

Context: The regulatory agencies and town govt. will be extremely upset and potentially pull all the permits.

Competitors: You’re competitors have been doing this for years and probably have far better facilities and will be able to promote far better ski and stay packages etc. They will likely have better advertising and larger marketing budgets.

Eddy replied, “I only take financial questions seriously. If my assumptions about occupancy rates and costs are correct, we should make a ton of money on this, right?”   Joe was reluctant to bother with this in light of his reservations to the strategy of the problem, but he agreed.

(f) Did Joe find support for the financial side (that is would there be an overall profit for the hotel assuming it had no affect on the ski ticket sales or the cost structure of the ski area operations) of this hotel idea in the absence of his strategic reservations with Eddy’s estimated number of rooms filled per night? Please justify your answer with a calculation.

Unit contribution = \$100 - \$10 = \$90

No at 140 Rooms * \$90/room/night (Unit Contribution) *150 nights = \$1.89 Million

Which is less than the expenditure of the hotel and the advertising by \$110K, thus you can’t make a profit at that rate, which has an extremely high occupancy rate (over 93%). You would have to have an occupancy rate of over 98% to turn a profit (which is likely unrealistic and still not a good idea for the strategic reasons mentioned before.)

Alternatively: they could focus on the B/E Units:

\$2MM / \$90 = Fixed Cost/ UC = 22,223 Rooms required

Total number of rooms = 140rooms/day * 150days = 21,000 Units.

Bonus Questions:

1. Volume and Cannibalization.

2. RC = \$.50

Margin = (Price – Cost)/Price = > Price = Cost/(1-Margin) = .5/.25 = \$2.

3. WSP = \$.50

Cost = Price / (1+Markup) = .5/1.5 = \$.33 = WC = MSP

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