Homework CH 11
The recently weak economy caused many consumers to switch to lower-priced products. Although P&G had sales of $77 billion in 2009, many of its relatively expensive brands, such as Tide detergent and Secret deodorant, were stranded on store shelves. So, in 2010, P&G did the unthinkable: It slashed prices on many of its products, such as batteries (13.3 percent), liquid laundry detergents (5.1 percent), shampoos (5.4 percent), and conditioners (6.6 percent). The price cuts come at a cost, however, and sales must increase considerably just to break even or make the price cuts profitable
1-P&G’s average contribution margin before the price cuts was 20 percent. Refer to Appendix 2 and calculate the new contribution margin if prices are reduced 10 percent.
Average contribution margin before the price cuts = 20%
Contribution Margin = price – variable cost / price
Assume price is 100
0.2 = 100 – x/100
20 = 100 –x
20 + x = 100
X = 100 – 20
X = 80 (variable cost)
Now if prices drop by 10% (100-100*0.1)= 90
CM = 90 – 80/ 90
CM = 0.11

2-What level of total sales must P&G capture at the new price levels to maintain the same level of total contribution before the price reduction (that is, total contribution = $15.4 billion, which is 20 percent of $77 billion in sales)?
Total sales = x
= (new ACM)*(sales) = (target total contribution)
= 0.11 *x = 15.4 x = 15.4/0.11 = 140