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Financial Exercise

Essay by   •  January 6, 2011  •  3,278 Words (14 Pages)  •  5,720 Views

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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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