With indirect channels of distribution, the base price of a product will be
discounted for individual distributors if they act in a way that benefits the company supplying the
product, such as paying their bills promptly or buying in quantity. These discounts have to be
taken into account in a brand’s profit and loss estimate since they can have a substantial
impact on profitability.
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1.
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Determining the Financial Impact of Quantity Price Discounts Given to
Distributors
Let us continue with the Ariadne skin cream project that has been the
basis for the Chapter 11 and Chapter 13 Marketing Math Questions. You have decided to
launch the Ariadne B version of your new product, the formula that provides a single, important U-V
protection advantage versus competition. You have also decided to charge retailers a case price
of $29.88 for Ariadne, which will result in it being sold at retail for $3.75 a unit. However,
you expect that a substantial amount of the consumer purchasing of Ariadne will be done in major drug
store chains like Shoppers Drug Mart. Since these retail operations are large, they can buy in
quantity and take advantage of your company’s quantity discount policies. Revise your profit and loss estimate for Ariadne B, assuming that 50% of
your brand’s
forecasted sales revenue will be discounted by 5%.
| | Ariadne B Original Estimate | Ariadne B Revised
Estimate 1 | Ariadne B
Revised Estimate 2 | | Estimated
Total Annual Sales Volume (cases) |
120,000
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120,000
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120,000
| | Estimated Price per case ($) | 28.00 | 29.88 | $29.88 on 60,000
cases;
Discounted case price on the remaining 60,000 cases | | Total Fixed Costs ($) | 750,000 | 750,000 | 750,000 | | Total Average Variable Cost per case ($) |
12.50
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12.50
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12.50
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Record your revised profit and loss estimate for Ariadne B in the
following chart:
| | Ariadne B
Original Estimate | Ariadne B Revised Estimate 1 | Ariadne B Revised Estimate 2 | | Sales Revenue ($) | 3,360,000 | 3,585,600 | | | Total Fixed Costs
($) | 750,000 | 750,000 | | | Total Variable Costs ($) | 1,500,000 | 1,500,000 | | | Net Profit ($) | 1,110,000 | 1,335,600 | | | Profit Margin (%) | 33.0 | 37.2 | | | | | |
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