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Midterm

# MGTA02H3 Study Guide - Midterm Guide: Fixed Cost, Personal Selling, Sales PromotionExam

Department
Management
Course Code
MGTA02H3
Professor
Arif Toor
Study Guide
Midterm

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MGTA02 â€“ Summer 2016
Midterm Test
SAQ Marking Guide & Model Answers
Question 1 5 Marks
Susan wants to start a business which creates specialty stuffed animals (â€˜stuffiesâ€™) for adults. She thinks
that a more sophisticated stuffy would sell well to adults who, motivated by nostalgia, yearn for the pets
they had as children. To get going with this business, Susan has done some planning and believes that
she needs to buy a sewing machine, proper desk, and storage rack. The desk and rack are available at
Mykea for \$300 each. She has just found a used, but appropriate sewing machine online for \$1,400. She
thinks that each stuffy will require the following materials: \$2 worth of suede-like exterior, 50 cents
worth of stuffing, and \$1.50 worth of decoratives (collar, facial features). Since she plans to keep herself
quite busy designing and selling the products, she will hire her sister Debbie to sew each stuffy, and will
pay her \$12 per hour to do so. Debbie believes that she can complete two stuffies per hour.
Susan has spoken to a number of potential customers, and also three people who own doll stores, and
through their advice she has decided that she will charge \$30 per stuffy.
She is a bit worried about the up-front purchase of the equipment, and is asking you for help. How many
stuffies will Susan need to sell to break even with this venture?
SOLUTION
Fixed Costs = \$300 + \$300 + \$1400 = \$2000
Var Costs: = \$2 + .50 + \$1.50 + \$6 = \$10
Price = \$30
BEP (units) = FC/(P-VC)
BEP = \$2000/(\$30 - \$10)
BEP = 100 units (NOT DOLLARS!)

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Question 2 7 Marks
What is meant by the Product Life Cycle? Describe each of its stages and explain how marketers need to
adjust their pricing and promotional initiatives as their product passes through each stage. Choose a
product that currently exists and give two pieces of evidence that the product is in the growth stage of
its product life cycle.
SOLUTION
The PLC defines the evolution that products and other things experience over time, as they pass through
introduction, growth, maturity and decline phases. These phases are expressed by changes in sales
levels, and also manifest by evolving product, pricing, distribution and promotional strategies. 2 marks
1 mark for each of the following:
During introduction: product released to the market. Promotion focused on education. Pricing often at
its highest. Distribution modest and little competition. Product may have flaws but this considered
tolerable by the early customers who see high value in the product
In the growth stage of the product life cycle, the market has accepted the product and sales begin to
increase. The company may want to make improvements to the product to stay competitive. Some
competitors see the validation of the product and enter the market. Distribution expands considerably.
In the maturity stage of the product life cycle, sales will reach their peak. Other competitors enter the
market with alternative solutions, making competition in the market fierce. Some companies will fail;
others will merge during this phase. Companies will try to win market share from each other.
In the decline stage of the product life cycle, sales will begin to decline as the product reaches its market
saturation point. Most products are phased out of the market at this point due to the decrease in sales
and because of competitive pressure. Companies will do what they can to get rid of inventory via special
promotions and will work to take what they have learned and created and to introduce the â€˜nextâ€™
product.
Example: 1 mark