Finance Analysis

1 January 2017

The price and promotion alternatives recommend for the two products by their respective brand managers included the possibility of using additional promotion or a price reduction to stimulate sales volume. A volume, price, and cost summary for the two products follows: Rash-AwayRed-Away Unit price $2. 00 $1. 00 Unit variable costs 1. 40 0. 25 Unit contribution $0. 60 $0. 75 Unit volume 1,000,000 units 1,500,000 units Both brand mangers included a recommendation to either reduce price by 10 percent or invest an incremental $150,000 in advertising. . What absolute increase in unit sales and dollar sales will be necessary to recoup the incremental increase in advertising expenditures for Rash-Away?

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How many additional sales dollars must be produced to cover each $1. 00 of incremental advertising for Rash-Away? For Red-Away? c. What absolute increase in unit sales and dollar sales will be necessary to maintain the level of total contribution dollars if the price of each product is reduced by 10 percent? a. 150,000 / . 60 = 250,000 units or $500,000 150,000 / . 5 = 200,000 units or $200,000 b. 500,000 / 150,000 = 3. 33 200,000 / 150,000 = 1. 33 c. (. 10×2. 00=0. 20) 1. 80 new unit price; new unit contribution is $. 40; 600,000/. 40 = 1,500,000; 1. 8 x 1,500,000 = $2,700,000; 2,700,000-2,000,000 = 700,000 (. 10×1. 00=0. 10) 0. 90 new unit price; new unit contribution is $. 65; 1,125,000/. 65 = 1,730,769. 23; . 90 x 1,730,769. 23 = $1,557,692. 31-1,500,000 = 57,692. 3077 3. Video Concepts, Inc. (VCI) manufactures a line of DVRs that are distributed to large retailers. The line consists of three models.

The following data are available regarding the models: Model| Selling Price per Unit| Variable Cost per Unit| Demand/Year(units)| Model LX1| $175| $100| 2,000| Model LX2| 250| 125| 1,000| Model LX3| 300| 140| 500| VCI is considering the addition of a fourth model to its line. This model would be sold to retailers for $375. The variable cost of this unit is $225. The demand for the new Model LX4 is estimated to be 300 units per year. These unit sales of the new model are expected to come from other models already being manufactured by VCI (10 percent from Model LX1, 30 ercent from Model LX2, and 60 percent from Model LX3). VCI will incur a fixed cost of $20,000 to add to the new model to the line.

Based on the preceding data, should VCI add the new model LX4 to its line of DVRs? Why? LX1 sales before cannibalization – 150,000 (75 x 2,000) LX2 – 125,000 LX3 – 80,000 total contribution is $355,000 LX1 sales after cannibalization – 147,750 (75 x 1,970) LX2 – 113,750 LX3 – 51,200 LX4 – 45,000 Total contribution is 357,700 No, VCI should not add the new model because while the new contribution is higher than the previous, it is not enough to cover the added fix cost of 20,000 4.

A sports nutrition company is examining whether a new high-performance sports drink should be added to its product line. A preliminary feasibility analysis indicated that the company would need to invest $17. 5 million in a new manufacturing facility to produce and package the product. A financial analysis using sales and cost data supplied by marketing and production personnel indicated that the net cash flow (cash inflow minus cash outflows) would be $6. 1 million in the first year of commercialization, $7. 4 million in year 2, $7. 0 million in year 3, and $5. million in year 4. Senior company executives were undecided whether to move forward with the development of the new product.

They requested that a discounted cash flow analysis be performed using two different discount rates: 20 percent and 15 percent. a. Should the company proceed with development of the product if the discount rate is 20 percent? Why? b. Does the decision to proceed with development of the product change if the discount rate is 15 percent?

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