Question

The AMZ Balderdash Company has two brands ("A" & "B"). Price and cost data for each are presented below. 

a) What are the respective brand contribution margins ($) of "A" and "B" to the AMZ Company? Assuming that AMZ Company is profit oriented and wishes to retain only one of these brands which brand would you recommend for retention? Explain your reasoning and state your assumptions! 

b) Given a 15% price cut, estimate the breakeven elasticity of each brand. Briefly discuss the implications of each B/E elasticity. (4 points) 

c) It has been proposed that the price of each brand be reduced by 15%. Unit variable costs are unchanged. What would be the new unit contribution margin and unit contribution margin ratio for each brand, assuming no change in unit variable costs? (4 POINTS)

Answer 1

Answer 1	Brand A	Brand B
Unit selling price	$                3.45	$                4.15
Less: Variable cost per unit	$                2.05	$                1.95
Unit Contribution margin	$                1.40	$                2.20
Unit Sold	725,000	1,255,000
Multiply: Unit contribution margin	$                1.40	$                2.20
Brand Contribution margin	$     1,015,000	$     2,761,000
Brand Contribution margin	$     1,015,000	$     2,761,000
Less: Fixed expenses	$         645,000	$         895,000
Net operating (loss)	$         370,000	$     1,866,000
Company would retain the Brand B. Because the Brand B has Higher net income.
Answer 2	Brand A	Brand B
Fixed expense	$         645,000	$         895,000
Divided by : Unit Contribution margin	$           1.4000	$           2.2000
Break even point in Unit sales	460,714	406,818
Using New prices
Unit selling price	$           3.4500	$           4.1500
Less: Decrease in price (Selling price * 15%)	$           0.5175	$           0.6225
Revised Unit selling price	$           2.9325	$           3.5275
Revised Unit selling price	$           2.9325	$           3.5275
Less: Variable cost per unit	$           2.0500	$           1.9500
Unit Contribution margin	$           0.8825	$           1.5775
Fixed expense	$         645,000	$         895,000
Divided by : Unit Contribution margin	$           0.8825	$           1.5775
Revised Break even point in Unit sales	730,878	567,353
Revised Break even point in Unit sales	730,878	567,353
Less: Break even point in Unit sales	460,714	406,818
Increase in break even	270,164	160,535
Divided by: Break even point in Unit sales	460,714	406,818
Increase in units required (%)	59%	39%
Increase in units required (%)	59%	39%
Divided by: Decrease in price	15%	15%
BREAK-EVEN ELASTICITY	3.91	2.63
Brand A is more risky if the price will drop compared to the Brand B.
Answer 3	Brand A	Brand B
Using New prices
Unit selling price	$           3.4500	$           4.1500
Less: Decrease in price (Selling price * 15%)	$           0.5175	$           0.6225
Revised Unit selling price	$           2.9325	$           3.5275
Revised Unit selling price	$           2.9325	$           3.5275
Less: Variable cost per unit	$           2.0500	$           1.9500
Unit Contribution margin	$           0.8825	$           1.5775
Unit Contribution margin	$           0.8825	$           1.5775
Divided by: Revised Unit selling price	$           2.9325	$           3.5275
Contribution margin Ratio	30.09%	44.72%