Question

1. When thinking about the global business environment, there are countries with policies and practices that encourage trade between nations and there are countries with policies and practices that discourage international trade. Discuss why a country would choose to encourage or discourage international trade. Also, as discussed in class, describe (using examples) the various tools that are used to encourage or discourage international trade.

2.

The Bluenose division of Schooner Industries manufactures rocking chairs that are sold to consumers through home improvement and furniture stores. In 2019 (last year), the division’s cost of goods sold represented 40% of sales. Their marketing expenses included selling expenses, promotion expenses, and freight. Selling expenses included sales salaries totaling $3 million and sales commissions (5% of sales). The company spent $3 million on advertising last year, and freight costs were 10% of sales. Other costs included $2 million for marketing managerial salaries/expenses and another $3 million for indirect overhead allocated to the division. Bluenose’s sales in 2019 totaled $30 million and their inventory turnover rate was 4.5.

In 2018 (the previous year), Bluenose had the following performance measures:

Gross margin %	55%	Return on investment	4%
Net profit %	8%	Net marketing contribution	$5,000,000
Operating expense %	47%	Inventory turnover rate	4.8

In 2019 (last year), the Bluenose division’s investments totaled $80 million (this included a plant expansion and inventory costs). Compared to 2018, would you say that Bluenose performed better or worse in 2019? Explain your answer using the performance measures we discussed in class.  Tip: to answer this question, it may be useful to create a profit-and-loss statement before doing any calculations.

3.

Helmut Schmidt recently had been promoted to product manager for Hohner Music Instruments Inc., a manufacturer of harmonicas, accordions, and ukuleles. He was sitting at his desk in Toronto reviewing his first assignment, which had just come from the company’s senior executive team. Schmidt, a marketing major who had barely survived Finance I, had just two days to calculate the break-even point for the company's flagship product, the Marine Band harmonica.

Company Background

In 1857, the 24-year-old son of a German family of weavers purchased one of the early handcrafted harmonicas and decided to go into business manufacturing his own brand. During his first year of business, Matthias Hohner, his wife, and one employee manufactured 650 harmonicas in their kitchen. Demand spiked after Hohner sent some harmonicas to cousins who had emigrated to North America, and soon after, Hohner Music Instruments Inc. built the largest harmonica fabrication facility in the world. The Hohner Marine Band harmonica (named after the band led by John Philip Sousa) was introduced in 1896 and went on to become the most popular harmonica in the world.

After he died in 1893, Matthias Hohner’s sons began expanding the product line to include accordions, later adding recorders and melodicas (essentially, recorder-type woodwind instruments with a keyboard layout like a piano just below the mouthpiece). In the 1980s, Hohner expanded further, offering a line of guitars and partnering to distribute Sabian cymbals and Sonor drums.

Since 2000, Hohner’s share of the global harmonica market had been fairly steady at approximately 75%, despite the growth of upstart competitors such as Lee Oscar (the brand launched by the harmonica player for the band War) which had about 10% market share. Other competitors tended to focus on specific regions, such as Suzuki in Asia or Hering in Brazil.

Hohner did not sell directly to end users or even to retailers but instead sold exclusively through distributors (wholesalers), which then supplied both online and brick-and-mortar musical instrument retailers.

Costs and Demand

Hohner had identified two basic buyer profiles, which were distinguished by the player’s seriousness about the instrument. The vast majority (about 95%) of buyers were casual players who made an impulse purchase of a less expensive harmonica (under $10). Such players typically owned only one harmonica.

On the other hand, more serious players tended to buy more expensive (at least $20) harmonicas in higher volumes. Many serious players owned as many as 40 or 50 harmonicas in different keys, with alternate tunings and by different brands. Such customers also tended to perform their own instrument repairs and retuning, which extended the lifetime of the harmonica. Though they represented a small minority of the customer base, one Hohner representative suggested these buyers accounted for as much as 30% of harmonica sales in Canada.

The Hohner Marine Band harmonica retailed for $30 in North America. North American retailers generally insisted on a 33% margin, and distributors (wholesalers) took a 12% margin, based on the selling price of each. Hohner and its direct competitors sold a total of 800,000 units annually, with Hohner’s share at 75%.

Hohner faced variable manufacturing costs of $2.70 per harmonica, with fixed manufacturing costs of $900,000 and an annual advertising budget of $500,000. The Marine Band manager’s salary and expenses totaled $35,000. Marine Band salespeople working for Hohner were paid solely by a 10% commission on Hohner’s sales. Shipping costs and insurance were $0.60 per unit.

Questions

Assume you are the manufacturer and answer the following questions using the information in the case.  Be sure to show all your work.

(a) What is the unit contribution for Hohner? (2 points)

(b) What is Hohner’s break-even point? (4 points)

(c) What market share does Hohner need to break even? (2 points)

(4) What is Hohner’s profit? (2 points)

Answer 1

Solving Problem 2, as HOMEWORKLIB's answering policy.

Selling Expenses = Sales salaries + Sales commissions

Selling Expenses	4.5
Sales salaries	3
Sales commissions	5%*30 = 1.5

Marketing Expenses = Selling Expenses + Promotion expenses + Freight

Marketing Expenses = 4.5 + 3 + 10%*30 = 10.5

Operating Expenses = Marketing Expenses + Marketing managerial salaries/expenses + Indirect overhead allocated to the division

Operating Expenses = 10.5 + 2 + 3 = 15.5

P&L	2019
Sales	30
COGS	12
Gross Profit	18
Operating Expenses	15.5
Net Profit	2.5

Balance Sheet	2019
Investments	80

	2018	2019
Gross Profit Margin	55%	60%
Net Profit Margin	8%	8.33%
Operating expenses	47%	51.67%
Return on Investment	4%	3.13%
Net marketing contribution	5	7.5
Inventory turnover rate	4.8	4.5

Return on Investment, Inventory Turnover Rate, & Operating Expenses (% of sales) have deteriorated.

GPM, NPM, NMC have improved.