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Mettel Products sells 100,000 flash drives annually to industrial distributors who resell the drives to business customers for $40 each. The distributors’ margins are 25%. Mettel Products’ cost of goods sold is $10.00 each. Mettel’s total variable costs (including selling costs) are $15.00 per drive. What is the gross margin (in percentage) enjoyed by Mettel Products on its drives? [Note: A firm’s margin on a product is typically calculated as a percentage of the firm’s selling price.] Mettel is considering increasing its annual advertising spending from $75,000 to $150,000. How many additional flash drives would it need to sell in a year in order to break-even? Now if instead of increasing its advertising spending, Mettel decides to reduce its price by $3 per drive, how many additional units would it need to sell in order to break even?

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Answer:

Instructions are listed below.

Explanation:

Giving the following information:

Mettel Products sells 100,000 flash drives annually to industrial distributors who resell the drives to business customers for $40 each. The distributors’ margins are 25%. Mettel Products’ cost of goods sold is $10.00 each. Mettel’s total variable costs (including selling costs) are $15.00 per drive.

Selling price= 40/1.25= $32

A) Gross margin= 32 - 15= 17

%= 53%

B) Mettel is considering increasing its annual advertising spending from $75,000 to $150,000.

Break-even point= fixed costs/ contribution margin

Break-even points= 150,000/17= 8,824 units

C) Break-even points= 75,000/14= 5,357 units

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