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Metrics 5 Mastery Worksheets - With Answers

Principles of Marketing (Ryerson University)

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Worksheet: Metric 5 Mark-up & Margin

1) A computer software retailer uses a markup rate of 40%. If the retailer pays
$25 each for computer games sold in its stores, how much do the games sell
for?

Answer:
The markup is 40% of the $25 cost, so the markup is:
(0.40) * ($25) = $10

Then the selling price, being the cost plus markup, is:
$25 + $10 = $35

Therefore the games sell for $35.

2) A golf pro shop pays its wholesaler $40 for a certain club, and then sells that
club to golfers for $75. What is the retail markup rate?

Answer:
The markup dollars is calculated as sales price less cost:
$75 - $40 = $35

The markup rate is then calculated:

Markup (%) = Markup dollars / Cost *100
= $35 / $40 *100
= 87.5%

3) A shoe store uses a 40% markup on cost. Find the cost of a pair of shoes that
sells for $63.

Answer:
The cost of the shoes is calculated as follows:
Selling Price = Cost + Markup ($)
= Cost + (Markup (%) * Cost)
$63 = Cost + (40% * Cost)
$63 = Cost + (0.4 * Cost)
$63 = (1 + 0.4) * Cost
$63 = 1.4 * Cost
Cost = $63 / 1.4
= $45

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4) In 2009, Donna Manufacturing sold 100,000 widgets for $5 each, with a cost
of goods sold of $2. What is the company’s margin? Identify a way that Donna
Manufacturing can increase its profit margin?

Answer:
First we have to calculate the gross profit:
Margin = Selling Price – Cost of Goods Sold
= $5 - $2
= $3

Now we can calculate the margin:

Margin (%) = Gross Profit / Sales * 100
= $3 / $5 * 100
= 60%

Ways to increase the profit margin:

- Decrease cost of material
- Decrease cost of manufacturing
- Increase sales price per unit
- Decrease COGS

5) If a product costs $100 and is sold with a 25% markup at a retail store, what
would be the retailer’s margin on the product? What should be the markup
and selling price if the retailer desires a 25% margin? Why might the retailer
be seeking to increase their margin?

Answer:
(a) To calculate the margin, we first have to determine the sales price:
Markup ($) = Markup (%) * Cost
= 25% * $100
= $25
Selling Price = Cost + Markup ($)
= $100 + $25
= $125
Margin (%) = Markup / Price * 100
= $25 / $125 * 100
= 20%
Therefore the retailer’s margin would be 20% when the product is
sold at a 25% markup.
(b) To calculate the markup and selling price at a 25% margin:
Selling Price = Cost / (1 – Margin (%))
= $100 / (1 – 25%)
= $100 / (1 – 0.25)
= $133.33

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Markup ($) = Selling Price – Cost
= $133.33 - $100
= $33.33
Markup (%) = Markup ($) / Cost * 100
= $33.33 / $100 * 100
= 33.33%
Therefore to obtain 25% margins, the product would have to be sold
at $133.33 with a markup of 33.33%.
(c) Reasons for increase include:
- Increase in fixed costs (rent, tax, commission, wages, etc.)
- Increase in demand and/or decrease in supply
- Other competitors/retailers charge more for the product and the
higher margin is a result of increasing sales price to match

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Worksheet: Metric 6 Pricing Wholesale to Retail

1) You are a manufacturer of widgets that sells your products to a wholesaler
who in turn sells directly to retailers. You have developed a new widget and
you know that your competition’s product retails for $23 in hardware stores.
You know yours is slightly better, and are pretty sure your product could sell
for $27. Assuming a retail margin of 33.3% and a wholesale margin of 25%,
what is the wholesaler’s selling price, and how much can you sell the widgets
to the wholesaler for?
We know – RSP - $27, RMGN – 33.3%, WMGN – 25%
Solve for WSP and WC/MSP
Answer:
Retailer Selling Price ($) = Retailer Cost ($)
[1 - Retail Margin (%)]
Retailer Selling Price ($) = Wholesale Selling Price ($)
[1 - Retail Margin (%)]
Wholesale Selling Price ($) = Retail Selling Price * [1 - Retail Margin (%)]
= $27 * (1 – 33.3%)
= $27 * (1 – 0.333)
= $18.00
To Calculate MSP:
Wholesale Selling Price ($) = Wholesale Cost ($)
[1 - Wholesale Margin (%)]
Wholesale Selling Price ($) = Manufacturer Selling Price ($)
[1 - Wholesale Margin (%)]
Manufacturer Selling Price = Wholesale Selling Price * [1 - Wholesale Margin]
= $18.00 * (1 – 25%)
= $18.00 * (1 – 0.25)
= $13.50

2) As a small appliance manufacturer, your cost to manufacture and package

your coffee maker is $10/unit. You want this to be a cash cow, so you decide
to sell the coffee maker to your wholesaler for $19/unit. You know that the
wholesaler’s margin is 25%, and that retailers typically take 33.3% margins
on small appliances. What will your coffee maker retail for rounded to the
nearest whole number?

We know – MC - $10, MSP / WC- $19, WMGN - 25%, RMGN – 33.3%

Solve for WSP & RSP?
Answer:
Wholesale Selling Price ($) = Wholesale Cost ($)
[1 - Wholesale Margin (%)]
Wholesale Selling Price ($) = Manufacturer Selling Price
[1 - Wholesale Margin (%)]

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= $19 / (1 – 0.25)
= $25.33

Retail Selling Price ($) = Retail Cost ($)

[1 - Retail Margin (%)]
Retail Selling Price ($) =Wholesale Selling Price ($)
[1 - Retail Margin (%)]
= $25.33 / (1 – 0.333)
= $37.98
Therefore the coffee maker will retail for $38.00

3) A bearing manufacturer buys raw materials for $0.50 per unit, turns the raw
materials into a roller bearing, and then sells the bearings to a wholesaler for
$1.00 per unit. The wholesaler then sells the bearings to retailers for $2.00
per unit, and finally consumers buy the bearings for $3.00 per unit. A)What is
the per unit margin in dollars for the manufacturer, wholesaler and retailer?
B) What is the percentage margin for the manufacturer, wholesaler and
retailer? C)What is the per unit margin in dollars and percentage margin for
the entire chain?

We know – MC – $0.50, MSP / WC- $1, WSP/RC - $2, RSP - $3

Solve for WSP & RSP?
Answer:
(a) Manufacturer margin ($) = $1.00 - $0.50 = $0.50
Wholesaler margin ($) = $2.00 - $1.00 = $1.00
Retailer margin ($) = $3.00 - $2.00 = $1.00

(b) Manufacturer margin (%) = $0.50 / $1.00 * 100 = 50%

Wholesaler margin (%) = $1.00 / $2.00 * 100 = 50%
Retailer margin (%) = $1.00 / $3.00 * 100 = 33.3%

(c) Chain margin ($) = $3.00 - $0.50 = $2.50

Chain margin (%) = $2.50 / $3.00 * 100 = 83.3%

4) If the raw material cost goes up by $0.25 per unit for the bearing
manufacturer in question 3, what will be the retail price charged to
consumers if all members in the chain maintain the same percent margin?
What is the effect of the raw material increase to the consumer? Why is it
important to understand channel margins and pricing practices?
Answer:
(a)
Manufacturer margin = 50%, Wholesaler margin = 50%, Retailer margin =
33.3%
Manufacturer Raw material cost = $0.50 + $0.25 = $0.75

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Manufacturer Selling Price ($) = Manufacturer Cost ($)
[1 - Manufacturer Margin (%)]
= $0.75 / 0.5
= $1.50
Therefore the manufacturer sells the bearings for $1.50 to the wholesaler
Therefore the wholesales costs are $1.50

Wholesale Selling Price ($) = Wholesale Cost ($)

[1 - Wholesale Margin (%)]
= $1.50 / 0.5
= $3.00
Therefore the wholesaler sells the bearings for $3.00 to the Retailer
Therefore the retailers costs are $3.00

Retail Selling Price ($) = Retail Cost ($)

[1 - Retail Margin (%)]
= $3.00 / (1 - .333)
= $3.00 / 0.667
= $4.50
Therefore the retailer sells the bearings for $4.50

(b) The price has increased by $1.50 to the consumer (or 50% increase).

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Worksheet: Metric 7 Break-Even

1) Apprentice Mousetraps wants to know how many units of its “Magic Mouse
Trapper” it must sell to break even. The product sells for $20. It costs $5 per
unit to make. The company’s fixed costs are $30,000.

Answer:
Break-Even Volume (#) = Fixed Costs ($) / Contribution per Unit ($)
Contribution per Unit = Sales Price per Unit – Variable Cost per Unit
= $20 – $5
= $15
Break-Even Volume (#) = $30,000 / $15
= 2,000 mousetraps

2) Apprentice Mousetraps wants to know how many dollars’ worth of its

“Deluxe Mighty Mouse Trapper” it must sell to break even. The product sells
for $40 per unit. It costs $10 per unit to make. The company’s fixed costs are
$30,000.

Answer:
Break-Even Revenue ($) = Break-Even Volume (#) * Price per Unit ($)
Break-Even Volume (#) = Fixed Costs ($) / Contribution per Unit ($)
Contribution per Unit = Sales Price per Unit – Variable Cost per Unit
= $40 – $10
= $30
Break-Even Volume (#) = $30,000 / $30
= 1,000 units
Break-Even Revenue ($) = 1,000 * $40
= $40,000

-OR-

Break-Even Revenue ($) = Fixed Costs ($) / Contribution Margin (%)

Contribution Margin (%) = Contribution per Unit / Selling Price per Unit
Contribution per Unit ($) = Price per Unit – Variable Cost per Unit
= $40 - $10
= $30
Contribution Margin (%) = $30 / $40 * 100
= 75%
Break-Even Revenue ($) = $30,000 / 75%
= $40,000

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3) John’s Clothing Store employs three salespeople. It generates annual sales of
$1 million and an average contribution margin of 30%. Rent is $50,000. Each
sales person costs $50,000 per year in salary and benefits. How much would
sales have to increase for John to break even on hiring an additional
salesperson?

Answer:
If the additional fixed cost of a salesperson is $50,000 and with an average
contribution margin of 30%, then:
Break-Even Revenue ($) = Fixed Costs ($) / Contribution Margin (%)
= $50,000 / 30%
= $166,666.67
Therefore sales would have to increase by $166,666.67 for John to break
even on hiring an additional salesperson.

4) A corn farmer wishes to identify how many bushels of corn he must sell to
cover his fixed cost at a given price. The farmer has costs consisting of $500
in real estate taxes, $700 interest on a bank loan, and $800 in other fixed
expenses. The variable cost per bushel is $1, and covers labour, corn seed,
herbicides and pesticides. If the price per bushel is $2, how many bushels
must he sell to break even?

Answer:
Break-Even Volume (#) = Fixed Costs / Contribution per Unit
Fixed Costs = $500 + $700 + $800
= $2000
Contribution per Unit ($) = Price – Variable Cost per Unit
= $2 - $1
= $1
Break-Even Volume (#) = $2000 / $1
= 2000 bushels

5) If the farmer in question 4 sells only enough bushels to break even, what is
his annual profit? Identify two ways the farmer could increase his annual
profit.

Answer:
Farmer’s annual profit = $0.

The farmer could increase his profit by:

- Growing more corn
- Increasing the price he charges per bushel
- Reducing his costs:

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- Pay off loan or find lower interest rate
- Reduce labour costs
- Find lower seed costs
- Find lower herbicide and pesticide costs
- Changing to a more lucrative crop
- Find alternative use for the land that offers a better return

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Worksheet: Metric 8 Return on Marketing Investment

(ROMI)
1) A marketer is evaluating two marketing campaigns. It is estimated that
Campaign 1 would generate incremental revenues of $250,000, at an
incremental cost of $50,000 and a contribution margin of 30%. Campaign 2
would generate incremental revenues of $50,000, at an incremental cost of
$20,000 and a contribution margin of 50%. If the marketer is basing their
decision solely on ROMI, which campaign should they go ahead with?

Answer:
ROMI for Campaign 1 is found by:
ROMICampaign1 = (Incremental Revenue * Contribution Margin – Cost) / Cost
= ($250,000 * 30% - $50,000) / $50,000
= 50%
ROMICampaign2 = (Incremental Revenue * Contribution Margin – Cost) / Cost
= ($50,000 * 50% - $20,000) / $20,000
= 25%
Therefore the marketer should select Campaign 1.

2) A clothing retailer is considering investing in a newspaper advertising

campaign to generate more sales. The campaign is expected to cost $3,000 in
creative agency fees and $9,000 in circulation costs, while increasing
revenues from $110,000 to $170,000. The retailer’s contribution margin
averages 25%. What would be the return on the marketing investment of the
newspaper campaign?

Answer:
Incremental Revenue = $170,000 - $110,000 = $60,000
Marketing Costs = $3,000 + $9,000 = $12,000
ROMI = (Incremental Revenue * Contribution Margin – Cost) / Cost
= ($60,000 * 25% - $12,000) / $12,000
= 25%

3) An alternative option for the clothing retailer (in the previous question) is to
invest in a direct mail campaign targeting previous customers – only a
fraction of the reach of the newspaper campaign . The cost of the direct mail
campaign would be $1,000, but would only result in increasing revenues to
$150,000. What is the return on marketing investment in this case?

Answer:
Incremental Revenue = $150,000 - $110,000 = $40,000

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ROMI = (Incremental Revenue * Contribution Margin – Cost) / Cost
= ($40,000 * 25% - $1,000) / $1,000
= 900%

4) If the clothing retailer (in the previous questions) decides to execute both the
newspaper and direct mail campaign what would be the combined return on
marketing investment.

Answer:
Newspaper Incremental Revenue = $60,000
Direct Mail Incremental Revenue = $40,000
Total Incremental Revenue = $60,000 + $40,000 = $100,000
Total Cost = $12,000 + $1,000 = $13,000
ROMI = (Incremental Revenue * Contribution Margin – Cost) / Cost
= ($100,000 * 25% - $13,000) / $13,000
= 92.31%

5) Which campaign should the clothing retailer in the previous questions

execute for maximum return on marketing investment? If the retailer is more
concerned with maximizing revenue growth, should they execute the
newspaper campaign, direct mail campaign or both? Why?

Answer:
a) Direct mail campaign (900% ROMI) as it is significantly greater than the
newspaper campaign (25%) and combined execution (92.31%).
b) Execute both as the revenue increase is $100,000; greater than the
$60,000 as a result of the newspaper campaign and the $40,000 as a
result of the direct mail campaign.

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