Preliminaries

·
This assignment consists of 5 questions worth a total of 10 points.The
number of points is indicated below, and next to each question.

Q1: 2 points, Q2: 1 point, Q3: 2 points, Q4:
2 points, Q5: 3 points.

·
Please enter allanswers on this document itself and submit via the portal
as a Word document.If you prefer to handwrite your answers, please do so clearly
and then submit a scanned pdf of the document.

·
If you make any assumptions, please state them clearly. Responses based
on unclear assumptions will not receive credit.

Please fill in:

Name: _________________________________________

NET ID[1] __________________________________________

Q1. (2
points)

The
volume of books that One.com, an online book retailer, needed to sell in order
to break-even in July 2014 was 10,000 units. Fixed expenses per month (salaries
and warehousing) are $60,000. The selling price per book is $10. In August 2014,
One.com decides to acquire author-signed copies of all books. Because of this,
variable costs per bookin August are expected to increase by 25% over the
previous month. What is the breakeven volume for August 2014, assuming the
price per book does not change? Please present your workings clearly.

QUESTIONS 2 and 3 are based on the following business
situation:

Peter
Rossi is considering starting a company called DollCo, which would be in the
business of making and selling cute porcelain dolls. To investigate demand, Peter
makes some sample figurines and hires Marketalpha, a NY-based firm, to conduct
some marketing research. Marketalpha suggests that DollCo should sell its
products in three states only: NY, NJ and CT. It determines that DollCo’s market
share (by volume) in the first year of operation will be 0.3% in NY, 0.5% in NJ
and 0.1% in CT. Peter thinks that he should go into business, and decides to follow
Marketalpha’s recommendations. He has turned to you to help him work out a
business plan.

DollCo
plans to manufacture the dolls in a rented manufacturing facility (monthly rent
is $2,000) and to lease an assembly machine for $66,000 per year. Additionally,
it will cost DollCo$3 per doll in materials and labor. Peter plans to sell the
dolls through Amazon.com. Amazon will buy the dolls from DollCo for $18 per
doll and sell them to final consumers to make a 15% margin per doll. Per the
arrangement with Amazon, DollCo will be responsible for delivering the doll to
the final consumer. DollCo will incur a cost of $6 per doll, to be paid to a
shipping company for this service.

Other
than those mentioned above, there are no costs (depreciation, taxes, etc.) or
revenues associated with the business. For the sake of simplicity, ignore all
costs that DollCo would have to incur after the first year, and all revenues
that the business would generate after the first year. Marketalpha estimates
the total market size of dolls to be 2 million units per year in NY, 1 million
units per year in NJ, and 3 million units per year in CT.

Q2. (1
point)

What
is the estimated sales volume (in units of dolls) for DollCo in the first year
based on the market research? Please present your workings clearly.

Q3. (2
points)

What
is the breakeven volume (in units of dolls) for DollCo for the first year?
Please present your workings clearly.

Q4. (2
points)

Organic
foods is one of the fastest growing industries in the US. Consider a 32-oz cup
of organic yogurt which consumers buy from supermarkets at an average retail
price of $4.00. Dannon, a prominent player in the industry, manufactures
organic yogurt in various cup sizes and ships all its products to organic foods
distributors. Distributors then deliver the products to individual
supermarkets. For a 32-oz cup of organic yogurt, the typical distributor margin
is 9% and supermarket margin is 35%. If the variable cost of production of a
32-oz cup is $2.00, what is the unit contribution (in $ per cup)earned by Dannon?
Please present your workings clearly.

Hint: Margin is specified as a percentage of
the selling price of the agent.

Q5. (3 points)

Two.com, a very successful online retailer of diapers and
other baby products, estimates that each of its existing consumers makes 10
purchases per year. 60% of these purchases are for “Big Diapers” and the
remaining are for “Small Diapers”. The unit contribution per purchase is $2.00
for Big Diapers and $0.20 for Small Diapers. Each year Two.com experiences a
churn of 90% of its customer base (or 90% of its customers never buy its
products again), presumably because its products are not relevant for babies over
a certain age. What is the maximum (in $ per customer) the firm should be
willing to spend on acquiring a customer? Use the concept of customer lifetime
value to answer this question. Assume a lifetime of three years, and
negligible marketing communication costs. Also assume that cash flows do not
need to be discounted in time.

[1] For example,sg248 is theNET ID ofSachin Gupta.