Finance Analysis

Topics: Net present value, Variable cost, Cash flow Pages: 4 (1073 words) Published: May 5, 2012
Please prepare each question.
Members of the class will be called at random to present their answers.

1. Executives of Studio Recordings, Inc., produced the latest compact disc by the Starshine Sisters Band, titled Sunshine/Moonshine. The following cost information pertains to the new CD: CD package and disc (direct material and labor)$1.25/CD

Songwriters’ royalties’$0.35/CD
Recordings artists’ royalties’$1.00/CD
Advertising and promotion$275,000
Studio Recordings, Inc., overhead$250,000
Selling price to CD distributor$9.00

Calculate the following:
a. Contribution per CD unit $9.00 - $2.60 = $6.40
b. Break-even volume $525,000 / $6.4 = 82,031.25 or $738,281.25 c. Net profit if 1 million CDs are sold $9 mil – (2.6*1mil + 525,000) = $5,875,000 d. Necessary CD unit volume to achieve a $200,000 profit 9x – (2.6x + 525,000) = 200,000; x=113,281.25

2. The group product manager for ointments at American Therapeutic Corporation was reviewing price and promotion alternatives for two products: Rash-Away and Red-Away. Both products were designed to reduce skin irritation, but Red-Away was primarily a cosmetic treatment whereas Rash-Away also included a compound that eliminated the rash. The price and promotion alternatives recommend for the two products by their respective brand managers included the possibility of using additional promotion or a price reduction to stimulate sales volume. A volume, price, and cost summary for the two products follows:

Unit price $2.00 $1.00
Unit variable costs 1.40 0.25
Unit contribution $0.60 $0.75
Unit volume 1,000,000 units 1,500,000 units Both brand mangers included a recommendation to either reduce price by 10 percent or invest an incremental $150,000 in advertising. a. What absolute increase in...
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