Financial Exercise

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