Paragraph with math info with it help please

1  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.) 

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. 

Expert Answers

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We are asked to find the estimated profit from the extended warranty program.

(1) 2006 sales were 320,000 units at $710.7 million. With a 4% increase in unit sales the sales for 2007 will be 320000(1.04)=332800 units.

The average cost per unit was 710700000/320000=2220.94 so the sales in 2007 will be 2220.9375*332800=$739.128 million.

This assumes that the prices remained the same year over year.

(2) The company expects to sell warranties on 75% of sales, and warranties are a flat 8% of sales. So the total income from warranty sales is:


(3) The company pays employees a 10% commission for warranty sales so after commission the company receives 44347680*.9=$39,912,912

(4) Since the customers have paid for a warranty the company must pick up any repair costs. ** These warranties are extensions -- above and beyond the original warranty. I am assuming that the company factors in all repair costs to determine profit on warranty sales.**

(a) 4% of all units fail, so we can expect 332800*.04=13312 failures.

- Of these 95% require minor repairs. So about 12646 will require minor repairs. Each minor repair takes on average 1.5 hours to fix for a total of 18970 hours. It costs the company $100 per repair hour so the company has $1896960 in costs.

- For the remaining 5%, these are outsourced at an average cost of $800 per unit. There will be 666 units for a total cost of $532480.

So the cost to the company of the warranty service is 1896960+532480=$2,429,440

(5) The profit from the warranty service will be the income less commission minus the costs.



The profit from warranty sales is approximately $37,483,472


As a quick check this is about 5% of sales which seems reasonable.

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