Help with this questions as it relates to the attached image story
Suppose that the number of HDTV sets sold in 2007 is projected to be 4% more than the number sold in 2006. How much profit can ElectronicCity expect per-store in 2007 from its warranty extension business? (Assume that the average selling price of an HDTV set in 2007 remains the same as in 2006.)
Certain data is missing, such as number of stores, probability of a customer buying a warranty, etc. Suitable assumption will be made to cover these aspects.
Total sales value in 2006 = $710.7 million
Expected sale value in 2007 = 4% more than 2006
= 104% of 710.7 million = $ 739.128 million
Assuming that 55% of transactions result in warrant sales (data taken from another enotes question on same dataset: http://www.enotes.com/homework-help/from-image-attached-you-could-you-please-help-481100)
Thus, sales resulting in warranty sale = 55% of $739.128 million = $406.5204 million
Warranty value@8% of sale price = 8% of 406.5204 = $32.522 million
Thus the company sells a total of $32.522 million worth of warranty sales in 2007. since total number of stores are not given, we will assume all this sale coming from a single store.
Cost of warranty:
Expected TV sales in 2007= 4% more than 2006 = 104% of 3,20,000 = 3,32,800
Failure@4% = 4% of 3,32,800 = 13,312 TV will report failure
Minor failure@95% cases = 95% of 13312 = 12646 cases
cost of minor repair = $100/hr * 1.5 hr = $150
cost of minor repairs = 12646 * 150 = $1.8969 million
Major failure@5% cases = 5% of 13312 = 666 major failure
cost of major failure = $800/case
total cost of major failure = 666*800 = $0.53248 million
total cost of warranty extension = $1.8969 + 0.53248 million = $2.42938 million
Total profit = Sale-cost = $32.522-2.42938 = $ 30.09262 million ~ $30.1 million
Hope this helps.
Hi thanks so much for your help. Im sorry I didn't give all the missing data, but pasted the rest of the document which should have the rest:
Phil’ s Story
Phil Tupelo graduated magna cum laude from the Kania School in 2006 with a major in marketing and a minor in philosophy, and was recruited by ElectronicCity, a “big-box” retail chain of 160 electronics and appliances stores scattered all over the East Coast and some Southern states. He had made a strong impression on ElectronicCity executives during a summer internship at the end of his junior year, and was being fast-tracked to a management position. As a part of the training process, he was to spend six months working as a floor
salesperson at the company’s flagship store in New York City. Phil began his work there on New Year’s Day, 2007.
ElectronicCity is among just a handful of national chains selling similar branded products ranging from kitchen and household appliances to consumer electronics and computers. The focus of the merchandising strategy for the past year has been on high-end, flat-screen, high- definition television (HDTV) sets. There is intense competition for market share in the HDTV category among competing national chains resulting in very low margins across the board. In light of this situation, a decision was made by the vice president of marketing to market aggressively a warranty extension contract to all buyers of HDTVs. (As its name implies, such a contract extends product protection over and beyond the manufacturer’s maximum coverage period.) Historically, warranty extensions have yielded high gross margins and have quickly become a major source of profitability for retail chains, and store managers are often under pressure to push them. At ElectronicCity, the bar for success in warranty sales was set high: an ambitious 75% of all HDTV units sold.
The HDTV brands carried by ElectronicCity were all from world-class electronics manufacturers. Given their track record, the marketing division has determined that these brands have an overall failure rate of about 4%. Moreover, most of these failures (approximately 95%) are due to minor setup or programming errors that could be resolved rather quickly (on average, 1.5 hours per incident) by technicians employed at the store. The average labor cost for store technicians, including all overheads, is $100/hr. For more serious failures, third-party repair vendors are available on a contract basis. ElectronicCity estimates that such types of failures cost, on average, about $800 per incident, including the cost of any replacement parts.
The company’s sales records show a volume of $710.7 million in revenues from sales of 320,000 HDTV units sold nationally in 2006. The price for a warranty extension is a flat rate of 8% of the sale price. Salespeople are trained to push the warranties at the point of completing a sale and earn a 10% commission on their respective monthly total of warranties sold. With each HDTV customer, salespeople are required to go through a scripted presentation that mentioned, at least three times, the complexity of electronic equipment, the high cost of repair, and the gap between manufacturers’ warranty cover and expected service life of the appliance. Only at the conclusion of this aggressive pitch were they to offer the customer the warranty extension.
If a supervisor determined that the scripted sales pitch was not delivered in its entirety, or that the salesperson had not offered the warranty on an eligible sale, it would result in a recorded exception that would be written up as a demerit. Preliminary research showed that buyers who received the canned presentation at the point of sale were five times more likely to buy the extended warranty than those who were not exposed to it, and management was forceful in its implementation of this practice.
Phil was able to see the effectiveness of this strategy right away. He saw how easy it was to convince certain customers of the importance of buying warranty protection on what may well be one of the most expensive items in their homes. Only a month into the job, he received a check for $360.40 as his incentive pay for selling warranty extensions during the period. He was impressed by the success of this marketing strategy which appeared to tie together concepts he
had learned back in college: pricing and promotion from a marketing class, and probabilities and failure rates from a statistics class. Being an eager learner and wanting to understand retail customers better, he soon found himself playing a little game at every opportunity: He would try to guess ahead of time whether a customer was going to buy the extended warranty or not. Guess what! His marketing professor was right after all. He could understand his customers well enough to predict their decision. He was batting 0.80 within a week, and at times could accurately predict the customer’s decision more than ten times in a row! He was proud of his ability to link his classroom knowledge to his professional environment.