Question

1. The AMZ Balderdash Company has two brands ("A" & "B"). Price and cost data for each are presented below. "A" "B" Unit price $3.45 $4.15 Unit variable cost $2.05 $1.95 Unit volume/year 725,000 units 1,255,000 units Annual Promotional expense $645,000 $895,000 a) What are the respective brand contribution margins ($) 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! (6 POINTS) 0 "A" ii) "B" 1 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

Contribution margin $ A B

Unit price $3.45 $4.15

Unit variable cost ($2.05) ($1.95)

Contribution margin $1.4 $2.2

AmZ company is a profit oriented company and if it wants to retain only 1 brand it should retain "B'' because the contribution per unit is more as compared to that of"' Á''. It also has a lower variable cost per unit and a higher unit price in comparison to ''A''.

''A"': Lower unit price hence lower revenue

The variable cost is higher and hence will reduce contribution

The unit produced is also low as compared to ''B''.

''B'': Higher unit price hence more revenue

The variable cost per unit is higher ,hence there will be higher contribution

The quontum of unit produced is also high.

b) Given price cut of 15% A B

Unit price reduced by 15% $ 2.9325 $ 3.5275

unit variable cost ($2.05) ($1.95)

Contribution margin $0.8825 $1.5775

break even point    730878 units 567353 units

($645000/$0.8825) ($895000/$1,5775)

old break even point 460714 units 406818 units

($645000/$1.4) ($895000/$2.2)

Increase in BEP units if Unit price

decreases by 15% 58.64% 39.46%

With a reduction in the unit price the brands have to produce relatively more no of units to break even.

the BEP units of A increases 58.64% & of B by 3946% with 15% decrease in selling price.

c) Given price cut of 15% A B

Unit price reduced by 15% $ 2.9325 $ 3.5275

unit variable cost ($2.05) ($1.95)

Contribution margin $0.8825 $1.5775

Unit contribution margin ratio 30.09% 44.72%

( 0.8825/2.9325)*100 (1.5775/3.5275)*100