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Hohner Musikinstrumente GmbH and Co KG Break Even Analysis Case Solution
| Solution Id | Length | Case Author | Case Publisher |
|---|---|---|---|
| 2728 | 1097 Words (9 Pages) | Julie Hennessy, Evan Meagher | Kellogg School of Management : 3-112-001 |
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The case talks about the break-even analysis of Hohner Musikinstrumente GmbH & Co. KG for its Harmonica product. The major task at hand was to calculate the break-even point of this product in units, the profit, and the market share value it is generating. Furthermore, retail price, variable costs like manufacturing, commission, and fixed costs like salaries, and advertising budget to perform break-even analysis. With the current costs and sales price, the unit contribution is 21.675, and break-even is 66206 units, the market share needed to break even is 8.276%, and the profit is 11570000. However, demand is expected to rise to 900,00, and Hohner wanted to increase the advertising budget to 1000000. This will increase the break-even to 89274 units. The dollar value of sales will then be 18692041.522, which is also the market share value. As Hohner does not sell directly to retailers, retailers’ margin was not used as a cost in these calculations. It is considering providing retailers margin of 40%, which will lower the unit margin significantly by 9.675, break-even will increase to 148321 units, and sales and market share required will be 40,325,581.395.
Following questions are answered in this case study solution
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What is the unit contribution for Hohner?
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What is Hohner’s break-even point?
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What market share does Hohner need to break even?
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What is Hohner’s profit?
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Industry demand is expected to increase to 900,000 units next year. Schmidt is considering raising his advertising budget to €1 million.
a. If the advertising budget is raised, how many units must Hohner sell to breakeven?
b. How many units must Hohner sell to achieve the same profit (in terms of dollar amount) next year as it earned this year?
c. What must Hohner’s market share be next year for its profit (in terms of dollar amount) to be the same as this year?
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After some reflection, Schmidt decided not to increase Hohner’s advertising budget. With industry demand expected to increase to 900,000 units next year, Schmidt thought he would give retailers an incentive to promote the Marine Band by raising their margins from 33% to 40%. The margin increase would be accomplished by lowering the manufacturer’s price of the product to retailers. Distributor margins would remain at12%.
a. If retailer margins are raised to 40% next year, how many Marine Bands must Hohner sell to break even?
b. How many units must Hohner sell to achieve the same profit (in terms of dollar amount) next year as it earned this year?
c. What must Hohner’s market share be for its profit (in terms of dollar amount) to remain at this year’s level?
Case Analysis for Hohner Musikinstrumente GmbH and Co KG Break Even Analysis
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Data from Case: |
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€ |
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Retail Price |
30 |
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German Retailers margin |
33% |
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Distributors margin |
12% |
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Total Units |
800000 |
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Hohner's share |
75% |
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Hohner's sales |
600000 |
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Costs: |
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Variable MC |
2.7 |
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Fixed MC |
900000 |
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Advertising budget |
500000 |
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Manager's salary and expenses |
35000 |
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Commission |
10% |
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Shipping cost, breakage, and insurance |
0.6 |
1. What is the unit contribution for Hohner?
Unit contribution takes into account the variable costs of producing a product, such as direct labor, direct material, variable overheads, etcetera, and deducts them from sales prices. This enables the analysis of the proportion of product-related costs. By subtracting distributor margin, variable manufacturing cost, commission, and shipping costs from sales prices of 30, a unit margin of 21.67 has been calculated.
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Unit contribution: |
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Sales price |
30.000 |
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Less: Variable costs |
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Distributor margin |
3.600 |
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Variable Manufacturing Cost |
1.125 |
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Commission |
3.000 |
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Shipping cost, breakage, and insurance |
0.600 |
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Unit Contribution |
21.675 |
2. What is Hohner’s break-even point?
The Break-even point measures how many goods should be sold to cover the total costs. It is calculated in units by dividing the fixed costs by the contribution margin. Using this formula, fixed manufacturing costs, advertising, and manager’s salary expenses were added and divided by the contribution to obtain a break-even of 66206 units.
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Break-even point: |
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Fixed costs: |
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Fixed MC |
900,000.000 |
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Advertising budget |
500,000.000 |
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Manager's salary and expenses |
35,000.000 |
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Total Fixed Costs |
1,435,000.000 |
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In units |
66205.306 |
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Approx |
66206 |
3. What market share does Hohner need to break even?
Market share measures the percentage of the market dominated by a product or company. To calculate the market share to break even, break-even units were divided by total units sold in the market, which gave a percentage of 8.26.
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