Question

Question 1 (25 points) Your company has a market share of 25%. The total market size is $100 million. Your contribution margin (the ratio of the contribution per unit over the price per unit) is 20%. Your variable cost is $16 per unit. You are thinking of hiring 10 more salespeople. The annual cost per salesperson (including salary and benefits) is $120,000. In addition, each salesperson receives as a bonus 10% of the sales he or she generates. How much should your market share increase to make this a profitable action? (Hint: To solve the problem you need to calculate the price per unit and then calculate the new contribution per unit that will reflect the added cost of the 10% bonus given to the salespeople.) You must show all calculations to receive credit. Question 2 (25 points) A large hotel resort decides to develop a customer retention program. The goal of this program is to motivate its heavy users to continue being loyal to the company Type here to search | о в а р а е 9

Answer 1

Variable cost per unit = $16

Sales Price per Unit = Variable Cost/(1-CM Ratio)

= 16/(1-20%)

= $20

Contribution Margin per unit = $4

Revised Contribution Margin per unit after bonus = 4 – 20*10%

= $2

Addition to fixed cost = 120,000*10 = $1,200,000

Increase in Sales required to break even on the new added costs = Addition to fixed costs/contribution margin ratio

= 1,200,000/10%

= $12,000,000

Hence, increase in market share required = 12 million/100 million

= 12%