Sales Assignment
Question #1 – Gross Margin and Mark-Up
Understanding Distributor Impact on Your Profit
You are the Sales Director of Microsoft’s Xbox division. Given the fact that Microsoft has some, but not many Microsoft branded/owned retail store locations, Microsoft has chosen to use marketing intermediaries including companies providing third-party logistics, warehousing, distribution, and retail sales. Distributors purchase large quantities of various Xbox products (consoles, accessories, games, bundles) from Microsoft and redistribute to retailers, using their own sales force, warehouse, and trucking capabilities. The distributor actually purchases, owns, stores, and delivers your product for you to many Xbox retailers, earning a profit on that activity. Retailers, Best Buy in this example, then resell the products, earning a profit on that activity. The value chain that you participate in has the following profile:
Give the above cost-of-goods and purchase price details for each Xbox holiday bundle, what is Microsoft’s gross margin (in both $US dollars and %), the distributor’s gross margin (in both $US dollars and %), and Best Buy’s mark-up (in both $US dollars and %)?
How would Microsoft’s gross margin rise, in both $US dollars and %, if Microsoft sold direct to the retailer, eliminating the profit of the distributor?
What would be Best Buy’s mark-up, in both $US dollars and %, if a reduction in the Distributor’s cost-of-goods sold for each Xbox allowed the Distributor to earn the same gross margin at a reduced selling price of $151?
Question #2 – Mark-Up & Discounts
Macy’s purchases model 505 straight-leg, blank ink denim jeans for women from Levis Straus & Co and sells them to consumers in 185 store locations across 35 U.S. states. Levis Straus & Co’s cost-of-goods-sold for each pair of these model 505 straight-leg, blank ink denim jeans for women is $21.85. Levis Straus & Co sells these model 505 jeans to Macy’s for $34.50 each. Macy’s in-turn sells each pair of these jeans to consumers for a suggested retail price of $58.49.
What is Macy’s mark-up, is $US dollars and %, on each pair of model 505 straight-leg, blank ink denim jeans for women from Levis Straus & Co sold at the suggested retail price?
Assume Macy’s includes model 505 straight-leg, blank ink denim jeans for women from Levis Straus & Co in the end-of-year sale (November 1st to December 31st) when every item in the store is discounted by 17.5% off the suggested retail price. What is the discounted price Macy’s customers will pay for model 505 straight-leg, blank ink denim jeans for women from Levis Straus & Co? What is Macy’s revised Mark-Up % after applying the 17.5% discount?
Assume Macy’s sells-through a quantity of 21,333 model 505 straight-leg, blank ink denim jeans for women at the discounted price during the end-of-year sale. What is the total revenue and, separately, gross margin in $US dollars, for Levis Straus & Co? What is the total revenue and, separately, mark-up in $US dollars, for Macy’s?
Question #3 – Discounts, Allowances and Free Goods
Understanding Alternative Promotional Choices
You are a sales representative for MillerCoors and have a prospective distributor, Vice-President of Product Planning Megan Thomson at Rocky Mountain Inc., who is interested in carrying your Coors Banquet line. Megan has asked for free cases of Coors Banquet for initial distribution and samples for her sales personnel who sell to the restaurants, grocery stores, and bars providing Coors Banquet to your end consumer customers. Megan’s specific ask is for five (5) free cases for each of the 1,488 warehousing operations Rocky Mountain Inc. manages across the United States. Your selling price is $12.43 to the distributor, and your gross margin is 24.5%.
What size order (quantified in both $US dollars and # of cases) in addition to the initial free goods must you secure from Rocky Mountain Inc. just to break even on this agreement?
When you propose this to your sales manager, Sarah Sayamuri, she suggests that you simply provide Rocky Mountain Inc. a flat $78,250 slotting allowance to cover Rocky Mountain Inc.’s initial distribution cost, and that Megan purchase the stocking amounts right away to stock the warehouses. Is this a better solution? If so, by how much, and why?
Does your assessment of the slotting allowance approach change if Sarah’s suggested amount is reduced by $10,000 to $68,250? In this reduced slotting allowance scenario, and assuming Rocky Mountain Inc. still requires five (5) cases for each of the 1,488 warehouses, what is MillerCoors’ net cost for the Coors Banquet line introduction?
Question #4 – Break-Even Analysis
Demonstrating Break-Even and Payout
You are an outbound tele-sales representative for Midwest Packaging and Container responsible for new customer acquisition in the high-tech manufacturing sector across the Midwest. With the end of the fiscal quarter fast approaching, you have been focused on closing your largest ever opportunity at Burnam Bits Corporation. Getting the deal across the finish line this month is extremely important: you forecasted the revenue as “100%” for the quarter to your sales manager Stone Gossard; and the sales commission will pay for the furniture you and your new spouse purchased on credit last month for your new apartment.
Edward Vedder, Burnam Bit’s Senior Director of Operations, has been your primary contact and confirmed, through your extensive qualification process, as the final decision maker. Following several discussions, information exchange, a successful call to one of your best reference customers, and assessment of a comprehensive proposal you presented in a 60-minute Skype video conference last week, Edward appears ready to purchase your packaging machine.
Somewhat unexpectedly, Edward sent you an email late last night requesting a final confirmation of the numbers supporting his economic business case to move forward. Your solution will reduce the cost of inserting, sealing, and pricing his product. The machine and tooling will cost Burnam Bits $335,500, plus installation fees of $77,750. Previously, Edward expressed confidence Burnam Bits will be able to reduce the per package cost by $0.226 per package with your solution. Burnam Bits runs 55,585 packages per day through this particular line. What is the number of manufacturing days Burnam Bits must run to fully recover Edward’s investment, but not make a profit?
Question #5 – Return on Investment (ROI)
Understanding ROI Over Time
You are a global account sales executive for the German software company SAP dedicated to meeting your annual sales goals while creating sustained value with a single client, Dell Computer.
Following several months of analysis that you initiated involving both SAP and Dell team members, Dell’s newly appointed Vice-President of Manufacturing Operations Nancy Lee-Barat is considering purchasing and installing a sophisticated software solution from SAP. The new system analyzes and eliminates plant expenses related to shrink (waste) due to defective parts in Dell’s laptop and tablet computer assembly facility in Round Rock, TX. The annual cost of this waste in Dell’s manufacturing operation is $790,150 per year.
Your SAP software solution takes roughly one year to implement (during which Dell will not benefit from reduced shrink). Once Dell employees are trained and using the software, experience with other customers (including Lenovo and Hewlett-Packard) indicates that this shrink will be completely eliminated. The cost of your software is $884,500 plus training costs of $97,500 in the first year.
What would be Dell’s ROI (quantified in both $US dollars and %) for the investment over the three-year period?
Question #6 – Return on Investment (ROI)
Understanding Customer ROI on Your Product
You have just completed your six-week new-hire onboarding product and sales training at 3M Corporation and been assigned to the Northern Illinois territory in the role of Regional Sales Specialist reporting to Sales Director Christina Hynde. Your largest and most important distributor is Laurel Canyon Inc. owned by Joni Mitchell with both administrative offices and warehouse facilities in the Pullman neighborhood of Chicago.
Each pallet of 3M’s product in the warehouse of Laurel Canyon Inc. holds $5,777 of product at Laurel Canyon Inc.’s cost of goods (your selling price to Ms. Mitchell), which she sells at a gross margin of 15.4% to industrial plants. Ms. Mitchell sells 162 pallets each year to her customers. Due to 3M manufacturing and shipping delay challenges two years ago, Joni made a reluctant decision to carry an average of 2 months of inventory of 3M product at all times.
What is Laurel Canyon Inc’s annual ROI (quantified in both $US dollars and %)?
By how much must inventory costs be reduced in a year for Laurel Canyon’s ROI to be 4.7%?
Hint on Return: Remember, that if Laurel Canyon Inc.’s gross margin is 15.4% of the selling price (by definition), then her cost of goods is 84.6% of the selling price (by definition). The selling price less the cost of goods would be the gain (profit) per pallet, and she sells 162 pallets over a period of one year.
Hint on Investment: Remember that Laurel Canyon Inc. currently carries 2 months of inventory all year long. This is a real cost to Joni which she definitely factors into her assessment of Laurel Canyon’s annual ROI associated with your 3M products.
Question #7 – Retailer Cost-of-Goods Sold, Selling Price, Revenue, and Mark-Up
You are 30 minutes into your final one-hour interview for a sales specialist role working for the San Francisco headquartered health and fitness company Fitbit. Everything has gone smoothly and you can feel your excitement building at the prospect of accepting a dream job working for a cool company on the west coast. During the earlier phases of the interview process, your hiring manager, Winston Ono, made it clear that success in sales roles at Fitbit required analytic skills. He also set your expectations that a few “math” questions would likely be a part of your final interview with his manager, Regional Vice-President LaShonda Jones.
LaShonda has just handed you a sheet of paper with the below problem. She tells you to write your approach and solution on the white board in the interview room.
Dick’s Sporting Goods, the retail chain that you will be assigned for the first several months of your sales training period, buys Fitbit’s most popular product from you at $39.99, and takes a mark-up of 74.5%.
What is the selling price of the product to the consumer?
What would Dick’s total revenue and mark-up, in $US dollars, be if the retailer sold 50,000 Fitbit units during the next twelve months in all stores combined across the US?
Question #8 – Third Man Records & Revolution #9 Vinyl
You are the newly hired General Manager of Third Man Records headquartered in Nashville, TN. Your manager is Third Man Records owner Jack White famous for his success and influence as a musician, song-writer, and producer. Third Man Records manufactures and sells collector quality vinyl LP records from various artists to independent record stores throughout the U.S. and around the world. The gross margin on each collector quality vinyl LP is 32%. Independent record stores pay Third Man Records a regular price of $16.25 for reach LP and, in-turn, sell to consumers at a suggested retail price of $24.99. A new independent record store and prospective new retail customer, Revolution #9 Vinyl located in Chicago, is planning a grand-opening celebration and the store owner, Mavis Staples, has contacted you with a request for Third Man Records to support the event. Specifically, she wants 180 free collector quality vinyl LPs to stock her store with a promise to stock a full assortment of your LP records at regular prices following her grand-opening month. You are pleased to see a new record store open in Chicago after a year in which nearly one-third of the independent record stores across the Midwest closed due to insufficient profit.
What is Third Man Records’ cost-of-goods sold in $ (U.S. dollar) terms for each collector quality vinyl LP? What is the cost to Third Man Records of the free goods? How many collector quality vinyl LPs will Third Man Records have to sell to Revolution #9 Vinyl at the regular price before you will recover this cost and break even on the investment to support Revolution #9 Vinyl’s grand opening?
Assume Mavis follows through on her commitment and becomes a recurring customer of Third Man Records collector quality vinyl LPs. Your first regular price order of vinyl LPs to Revolution #9 in the month following the grand opening is 77 LPs which, according to Mavis’ forecast, is likely her consistent order quantity for the next year. How many months will it be before Third Man Records breaks even on the investment to support the grand opening? What is your break-even timeframe (quantified in months) if Mavis’ monthly order quantity is only 54 LPs?
Finally, should you accept Mavis’ request? Why or why not?
Question #9 – Discounted Cash Flow and Net Present Value
Understanding Competitive Differentiation
After 18 months of hard work, self-paced learning, and success at Salesforce, you have just been promoted from Associate Sales Representative to Account Executive. Your annual salary was increased by 11% overnight which will certainly help reduce some of the stress you have felt balancing student loan repayment with the costs of an exciting (but expensive) life in Chicago.
You are backfilling Heather Lee, your onboarding mentor who was just promoted to her first sales manager role in Boston. Your territory includes a handful of existing clients and new business responsibility for pharmaceutical industry firms with at least $50M in annual revenues in the states of Illinois, Wisconsin, Michigan, Iowa, and Minnesota.
One of the largest opportunities Heather handed over to you is a new customer relationship management (CRM) solution for Eli Lilly and Company headquartered in Indianapolis. Heather has been negotiating with the decision maker, Chief Revenue Officer Declan Macmanus, for several months. The total purchase price of the integrated Salesforce Sales Cloud solution is $678,000 for 1,100 new tablet computers and cloud software plus $14,250 installation and training costs. It is expected that your solution will reduce the customer support cost of Lilly’s operation by $176,600 per year. The solution will have a life of 6 years. The tablet computers included in your solution can be resold at the end of the period for $295,500.
Salesforce’s competitor in this opportunity at Lilly is Microsoft with their Dynamics CRM solution. The Microsoft sales team has presented a similar system which has a purchase price of $708,022, free installation costs, an annual reduction of the customer support cost of Lilly’s operation of $184,000 per year. The Microsoft solution is also expected to have a life of 6 years. The tablet computers included in this solution can be resold at the end of the period for $275,000. The account executive from Microsoft, Caroline Partum, has influenced Declan to believe that her higher initial price is justified by the incremental annual higher savings.
Neither Salesforce nor Microsoft is offering financing as Lilly is expected to pay upfront for this solution. Mr. Macmanus can borrow from Lilly’s bank at a rate of 3.5%. He has asked you to use this cost-of-capital rate for any net present value calculations.
You have been asked to prepare a six year financial comparison of the two proposals. Specifically, all costs and benefits are to be provided in today’s dollar terms. Mr. Macmanus has indicated that he will quickly make his decision on that basis, as he perceives the systems are nearly identical. Which of the two proposals offers the best ROI (quantified in both $US dollars and %) for Lilly?
How do the ROIs of the two proposals (quantified in both $US dollars and %) change for Lilly if Lilly’s cost-of-capital is only 2.9%?
