Chipman Union Case Analysis
CU Potential Sales & Profits from Oder-Eater Hosiery| | | Display Boxes| 15000| Case Size (packages)| 24| Total Potential Package Sales| 360000| Average Sale price/package| $6.
00 | Average Gross Profit/package| $1. 30 | Inventory Turnover Times Annually| 2. 54| Potential Sales/year| $5,486,400. 00 | Sales through food & drugstores (75% of potential sales)| $4,114,800. 00 | Potential Profit from sales/year| $1,188,720.
00 | Expenses over the first 3 years| | | | | | | | Non-Promotional| | | | | Year 1| Year 2| Year 3|Advertising for 25% unaided awareness in the US| $1,000,000 | | | 3 salespeople/year| $210,000 | $210,000 | $210,000 | Display Boxes| $1,500,000 | | | Consulting| $100,000 | | | Combe License (1st year)| $60,000 | | | Combe Royalty = 5% of 2nd year sales| | $274,320. 00 | $274,320. 00 | Commission to brokers (=5% of sales through food & drugstores)| $205,740. 00 | $205,740. 00 | $205,740. 00 | | | | | Promotional Expenses| | | | | | | | Cash Refund Offer| $75,000 | $75,000 | $75,000 | 25-cent Coupon| $136,500 | $136,500 | $136,500 | Off-invoice allowance for food & drugstores| $822,960.
0 | $822,960. 00 | $822,960. 00 | Advertising allowance of 5% for 55% of sales| $150,876. 00 | $150,876. 00 | $150,876.
00 | | | | | Total Expenses| $4,261,076 | $1,875,396 | $1,875,396 | From the above calculations, we observe that if CU gives out all the suggested promotions (discounts and allowances), the total expenses exceed the potential gross profits/year (Note: Instead of netting the promotions from the sales, they are equivalently treated as expenses). This would not allow the firm to break even. Removing the off-invoice allowance brings the expenses below the gross profits (except for year 1).
