Financial Exercise

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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 required100,000 (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 = 200,000 units
$150,000
Absolute Increase in Dollar Sales = .75 =$200,000 2.How many additional sales dollars must be produced to cover each $1.00 of incremental...
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