Financial Exercise
Essay by 24 • January 6, 2011 • 3,278 Words (14 Pages) • 5,724 Views
Problem 1
1. Calculate the contribution per CD unit
Selling price to CD distributor $9.00
Less: Variable cost
CD Package and disk (direct material/labor) $1.25/unit
Songwriter’s royalties $0.35/unit
Recording artists’ royalties $1.00/unit
Total variable cost 2.60
Contribution per CD unit $6.40
2. Calculate the break-even volume in CD units and dollars
Total Fixed Cost: Advertising and promotion $275,000
Studio Recordings, Inc. overhead 250,000
Total $525,000
Contribution per CD unit (from #1 above) $6.40
Contribution margin ($9.00-$2.60)/$9.00=.711 or 71.1%
$525,000
Break-even volume in units = $6.40 = 82,031.25 units
$525,000
Break-even volume in dollars = .711 = $738,396.62
= 82,031.25 x $9.00 = $738,281.25
(Difference is due to rounding the contribution margin percent)
3. Calculate the net profit if 1 million CDs are sold
Total Sales (1,000,000 units x $9.00) $9,000,000
Less: Total Variable Cost (1,000,000 units x $2.60) 2,600,000
Less: Total Fixed Cost 525,000
Net Profit $5,875,000
4. Calculate the necessary CD unit volume to achieve a $200,000 profit
Profit objective = $200,000
Fixed cost = $525,000
Contribution per Unit = $6.40
$525,000 Fixed Cost + $200,000 Profit Objective
$6.40 Contribution per Unit = 113,281.25 units
Problem 2
1. What is VCI’s unit contribution and contribution margin?
Selling price for VCI: $20.00 Suggested retail price
- 8.00 Retailer margin (40% of
$12.00 suggested retail price)
Variable cost per unit
Copy Reproduction ($4,000/1000) $4.00
Label & Package Mfg. ($500/1000) .50
Royalties ($500/1000) .50
Total Variable cost per unit $5.00
Unit contribution = $12.00- $5.00 = $7.00
$7.00
Contribution margin = $12.00 = .583 or 58.3%
2. What is the breakeven point in units? In dollars?
Fixed Costs:
Distribution rights for film $125,000
Label design 5,000
Advertising 35,000
Package design 10,000
$175,000
$175,000
Breakeven points in units = $7.00 = 25,000 units
$175,000
Breakeven points in dollars = .583 = $300,172
3. What share of the market would the film have to achieve to earn a 20 percent
Return on VCI’s investment the first year?
20 percent return first year $150,000 (investment) x .20 = $30,000
Fixed cost plus required return $175,000 + $30,000 = $205,000
$205,000
Units required to achieve return $7.00 = 29,286 units
29,286/(B/E Unit Volume)
Market share required 100,000 (est. Mkt. Size) = .293 or 29.3%
Problem 3
1. What absolute increase in unit sales and dollar sales will be necessary to recoup the incremental increase in advertising expenditures for Rash-Away? Red-Away? $2.00-$1.40
Rash-Away: Contribution Margin = $2.00 = 30%
$150,000
Absolute Increase in Units Sales = $.60 =250,000 units
$150,000
Absolute Increase in Dollar Sales = .30 = $500,000
$1.00-$.25
Red-Away: Contribution Margin = $1.00 = 75%
$150,000
Absolute Increase in Unit Sales = $.75
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