Case Example

Whirlpool Corporation: International Consumer Products Division

Unit Selling Price Less Variable cost Mfgr. Mktg. Unit variable contribution to margin : Percentage variable contribution to margin: First year Direct Fixed Cost Production set up charge Advertising and promotion Sales force expense 85,000 Total Direct Fixed Cost First year expected profit (Loss) $ 600,000 $ 550,000 $ 340,000 $ 1,490,000 $ ( 200, 000) 4x$ 75.00 240 140.00 24.00 $ 75.00 = 31.67 164.00 $ 240.00

Second year Direct Fixed Costs:

Sales Force expense 100,000

Advertising Promotion Total New Marketing Expense Old Direct Fixed Cost production set up charge year 2) Total Direct Fixed Cost

2x
$ 200,000 $ 350,000 $ 550,000 $ 890,000 ( No

$ 1, 440, 000

Second year Expected Profits

200,000

Required Level of sales (RLS) for the first year

# RLS = TDFC + CTM = $ 1,490,000 + (200,000) = 16,974 units UVCM $ 76 $ RLS = TDFC + CTM = $ 1,49,000 + ( 200,000) = $ 4, 073, 760 PVCM .316667 0r, 16,974 x $ 240 = $ 4,073,641

Required level of sales (RLS) for the second year:

Note: the production set up charge is a one time charge and is not included in the second year calculation
# RLS = (Current DFC + New DFC) + CTM UVCM

= ( $ 890,000 + $ 550,000) + 200,000

$ 76

= $ 1,640,000 = 21, 579 units $76

$ RLS = Current DFC + New DFC + CTM

PVCM
= ( 890, 000 + 550,000) + 200,000 .3166667 Or, 21,579 x $ 240 = $ 5,178,492 Incremental ( additional) Required Level of Sales for the second year Note: In order to earn 200,000 CTM in the second year, it is necessary to earn an additional $ 400,000 more than in year one, since tear one projected a loss of $ 200,000. That is, the spread between year 1 and 2 is $ 400,000 = 1,640,000 .3166667 = $ 5,178,942

# RLS = NEW DFC + New CTM UVCM = ( 550,000 - $ 600,000) + $ 400,000 = $ 350,000 = 4,605 75 75 Check: 21,578 16, 974 = 4805 $ RLS = 350,000 = $ 1,105,262 .316667 Check: $ 5, 178, 942 - $ 4,073,841 = 1,105,301 ( rounding error difference)