Drill 13 ·
AP Business with Personal Finance: Distribution Channels Drill (Drill 13) is a practice drill. It contains 5 original questions created by Brian Stewart, a Barron's test prep author with over 20 years of tutoring experience.
A distribution-channel tradeoff drill set for AP Business with Personal Finance; uses an invented company and original figures.
Tovenhill Packs makes backpacks and is deciding how to sell its newest model. It is weighing two distribution channels: selling directly to customers through its own website, or selling through a retail chain that puts the pack in stores. The table compares the two channels on the figures the owner cares about.
Tovenhill Packs: Channel Comparison (per-unit and reach estimates)
| Channel | Margin to Tovenhill per pack | Estimated annual units sold | Control over customer experience |
|---|---|---|---|
| Direct (own website) | $30.00 | 4,000 | High |
| Retail chain | $18.00 | 10,000 | Low |
Rounding: report all dollar amounts to the nearest whole dollar.
Question 1. Which channel gives Tovenhill the higher margin per pack?
Explanation: Q1: The direct channel, at $30.00 per pack. The table shows the direct website channel returns $30.00 per pack to Tovenhill, more than the retail chain's $18.00. The retail chain's margin is $18.00, not the higher figure. The two channels do not give the same margin; they differ by $12.00 per pack. The $30.00 figure belongs to the direct channel, not the retail chain.
Question 2. When Tovenhill sells through a retail chain that buys the packs and resells them in its stores, the retail chain is acting as what in the distribution channel?
Explanation: Q2: An intermediary between the maker and the final customer. A retailer that buys a product and resells it to the end customer sits between the maker and the buyer, which is exactly what an intermediary is in a distribution channel. Tovenhill, not the retail chain, manufactures the packs. A direct-to-consumer channel is the website option, where there is no middle party, so that label fits the other channel. A raw-materials supplier sells inputs to Tovenhill rather than reselling finished packs, so it is a different role.
Question 3. How much more total annual margin does the retail-chain channel generate than the direct channel (total margin equals per-pack margin times annual units)?
Explanation: Q3: $60,000. The direct channel earns $30.00 times 4,000 units, which is $120,000. The retail chain earns $18.00 times 10,000 units, which is $180,000. The difference is $180,000 minus $120,000, or $60,000. The $120,000 figure is the direct channel's total alone, not the difference. The $180,000 figure is the retail chain's total alone. The $300,000 figure is the two totals added together, not the difference.
Question 4. Why does the direct channel give Tovenhill a higher margin per pack but reach fewer customers than the retail chain?
Explanation: Q4: Selling direct avoids sharing margin with a retailer but gives up the retailer's wide store network and foot traffic. Going direct keeps the margin a retailer would otherwise take, which is why the per-pack margin is higher, but it loses access to the retailer's many stores and shoppers, which is why reach is lower. The higher margin comes from not splitting it with an intermediary, not from charging customers a much higher price. The claim that direct reaches more customers contradicts the table, which shows direct selling fewer units. The retail chain actually pays a lower margin ($18.00 versus $30.00), so that choice is false.
Question 5. Tovenhill's owner decides the top priority is to sell the most packs this year, even if margin per pack is lower. Based on the table, which channel best fits that goal?
Explanation: Q5: The retail chain, because it sells the most packs. The stated priority is selling the most packs, and the retail chain's estimate of 10,000 units far exceeds the direct channel's 4,000, so it best meets that goal. The direct channel's higher margin is a real strength but it is not the chosen criterion, which is unit sales. Splitting evenly ignores the goal and would not maximize packs sold. High control over the customer experience is a benefit of the direct channel but, again, it is not the unit-sales goal the owner named.