Assume it costs Tamara $85 to produce each litter box, and $15 to ship each one to pet care wholesalers.


Assume it costs Tamara $85 to produce each litter box, and $15 to ship each one to pet care wholesalers. Tamara expects she will need to spend $1,000,000 on advertising, $500,000 on app development, and $1,000,000 on general administrative overhead (including rent for a production facility and her own salary) for the entire planning period (3 years). She does not anticipate any cost changes over the planning period. Tamara plans to use sales agents to sell the litter boxes to the wholesalers for her. They will be paid entirely by receiving a 3% commission (based on her selling price to the wholesaler) on each unit they sell. Assume that wholesalers then take a 25% mark-up on their costs, and that retailers take a 40% margin on their selling price. Tamara has gathered some other possibly relevant facts. Approximately 36 million households in the U.S. have one or more cats, and cat owing households on average have 2.1 cats. Basic plastic litter boxes that need to be cleaned daily by hand sell at retail for $6-$85 dollars, with the higher prices for ones with more sophisticated designs. Other self-cleaning litter boxes sell at retail for $75-$350 dollars. None are as sophisticated or have as many features as Tamara’s. Tamara tells you that her goal is to make $1,000,000 in profit for herself over the three-year planning period. She would like you to answer the following questions for her (a) first assuming the price the retailers will charge to the end consumer for her box, including the app, is $400 and (b) then assuming it is instead $600. For your calculations, please retain two digits after the decimal point.

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1.How much is Tamara’s unit margin (also called the unit contribution) in terms of a dollar amount? (Hint, you need to use the information Tamara provided to work backwards from the retail selling price to calculate the manufacturer’s selling price, i.e., the price Tamara will sell her litter boxes to the wholesaler at, and her variable costs per unit. Commission is based on her selling price.)

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