Case Study: Making a Profitable Product Selection
The Situation
Lightning Wholesale is looking at changing its ski product line for 2014. It wants to carry only two brands of skis. It has received four offers from four different ski manufacturers. The details of the offers are in the first table. It will select the two brands that offer the highest total profit. The accounting department has analyzed 2013 sales and provided the income statement summarized in the second table, which specifies the percentage of each category that is attributed to the sporting goods department.
The Data
| Nordica | Fischer | Ogasaka | Atomic | |
| List Price: | $799.95 | $914.99 | $829.95 | $839.99 |
| Discounts: | ||||
| Retail | 40% | 40% | 40% | 40% |
| Wholesale | 5% | 11% | 6% | 7% |
| Seasonal | 3% | 5% | ||
| Sale | 5% | 5% | 10% | |
| Loyalty | 3% | 5% | ||
| Quantity | 3% | 4% | 5% | 2% |
Lightning Wholesale Income Statement
| Year (2013) | Allocation of Dollars to Sporting Goods | |
| Sales Revenue: | $57,77 | |
| 7 | 20% | |
| Cost of Goods Sold: | $50,44 | |
| 5 | 19% | |
| Operating Expenses: | ||
| Sales and Marketing | $3,234 | 18% |
| General and Administrative | $348 | 14% |
| Payroll | $1,416 | 19% |
| Total Operating Expenses: | $4,998 | |
| Operating Income: | $2,334 |
*All dollar figures are in thousands
Important Information
- All of Lightning Wholesale’s retail customers plan to sell the skis at the list price.
- Lightning Wholesale prices all of its skis on the assumption that all of its retailers use the standard industry markup of 40% of the regular selling price.
- Skis fall into the sporting goods category for Lightning Wholesale.
- Expenses are assigned to products based on the percentage of cost method for each category.
- Forecasted sales for each brand (if carried by Lightning Wholesale) in 2014 are as follows:
Nordica = 380 units
Fischer = 270 units
Ogasaka = 310 units
Atomic = 300 units
Your Tasks
- Based strictly on financial considerations, recommend which two brands Lightning Wholesale should carry in 2014.
a. Using the appropriate table, calculate the net price (cost) of each brand of skis.
b. To determine the expenses for each brand of skis:
Using the appropriate table, calculate the dollar values assigned to sporting goods for each row by multiplying the company total by the allocation percentage.
Total the dollar amount of the expenses.
Convert the total expenses into a percentage of cost.
Calculate the expenses for each brand using the percentage of cost.
c. Using the appropriate table, calculate the wholesale price (the amount at which Lightning Wholesale will sell the skis to a retailer).
d. For each brand, calculate the profit per unit.
Calculate the total profitability for each brand. - At the end of the year, if any inventories are left over, Lightning Wholesale clears out all ski products at break-even.
a. Determine the break-even prices for the two recommended brands.
b. Determine the markdown percentage that can be advertised for each recommended brand.
The section is reproduced from the case study section in Chapter 4 in Fundamentals of Business Mathematics by OER Lab licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License