Question

You are pitching a marketing proposal to a company that sells electronic equipment. For a particular product line, their current sales price is $20 per unit, cost is $9 per unit and they have $20,000 in fixed costs associated with this line. Last year, they sold 8,200 units. You are proposing that the company implement your marketing plan which will cost $3,000 per year. You believe this will increase their sales units by 350 units. Calculate the contribution margin ratio at the projected levels, the projected change in operating income of your proposal and the projected ROI. Additionally, if the company requires a 12% return on its investments, calculate the maximum you could charge for your marketing plan.

Answer 1

Answer:              

                           without marketing         with marketing           differential

                           plan                                plan                             amount

total sales           8,200                             8,550                          350

sales revenue    $164,000                       $171,000                      $7,000

variable costs    ($73,800)                       ($76,950)                     ($3,150)

contribution        $90,200                        $94,050                      $3,850  

margin

contribution            55%                              55%                               -

margin ratio

fixed and            ($20,000)                     ($23,000)                     ($3,000)

marketing costs                                                                                          

operating            $70,200                        $71,050                       $850

income

The return on investment (ROI) from your marketing plan = $850 / $3,000 = 28.33%

If the required ROI is 12%, then you could charge = net increase in operating profits / (1 + required ROI) = $3,850 / 1.12 = $3,437.50