# Financial Exercise

Pages: 12 (2067 words) Published: May 1, 2008
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
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
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...