Description
Summary:
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FND Hill has two options to enter the small business market – through a partnership or through direct sales. The costs and pricing differs for each approach.
Hill Partnership:
-Sales price is 35% lower
-Hill would sell and service the products
-FND is considering paying commissions to their own sales force
Direct Sales
-Sales are expected to be 25% of possible sales through the partnership
-Service and sales support costs would be incurred
1. Determine the unit contribution margin for the RX-10 model and for the RX-50 model under the direct-sales approach.
2. Determine the unit contribution margin for each of the two product models selling through the potential Hill partnership channel. Prepare your analysis including and excluding commissions.
3. The Hill partnership has estimated low sales volume of 2,500 and estimated high volume of 5,000 units. The estimated direct sales volume would be 25% of the Hill partnership. Using your calculations from Questions 1 and 2, above, prepare an analysis of incremental Total Contribution Margin (TCM) for sales through the Hill channel for four scenarios:
a. If all Hill sold was RX-10s in a volume of 2,500 units per year.
b. If all Hill sold was RX-50s in a volume of 2,500 units per year.
c. If all Hill sold was RX-10s in a volume of 5,000 units per year.
d. If all Hill sold was RX-50s in a volume of 5,000 units per year.
(Those four possibilities should provide good estimates of the minimum and maximum TCM effects of the proposed partnership arrangement.) Note that the case estimates direct sales at 25% of those sales possible through Hill. In your comparison, use 25% of the Low & High estimates for the comparable direct sales.
4. Identify the categories of potential differential fixed costs that might arise in pursuing either the direct-sales initiative or the Hill channel partnership. Which are relevant to your recommendation and which are not? (Hint: use the activity based hours and costs for service and sales support, if applicable)
5. Provide an assessment of the role that the sales commission data plays in your overall recommendation analysis. What role should it play, and why?
6. Provide an assessment of the threats associated with partnering with Hill. How does this figure into the decision? Why?
Hints:
Warranty parts costs (service rate x parts) are considered a variable cost and are applicable in both sales approaches. Sales and service costs are potential incremental fixed costs.
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