Question

. (25%) Beyond-say, an emerging musical artist, has just launched a new CD. The following cost information is available for the new CD: • CD package and disc (material and labor) $2.25 per CD • Songwriter’s royalties $0.35 per CD • Recording artists’ royalties $1.00 per CD • Advertising and promotion $375,000 • Studio rental and overhead $300,000 Beyond-say’s selling price to the CD distributor is $10.00. Calculate the following: a. Contribution per CD unit: b. Break even volume in CD units and dollars: c. Profit if 1 million CDs are sold: d. CD unit sales volume required to achieve a profit of $200,000: 2. (45%) The VP Marketing at Big Pharma Inc. was

Answer 1

a. Contribution per CD unit: $6.40

b. Break even volume in CD units: 105,469 and dollars: $1,054,687.50

c. Profit if 1 million CDs are sold: $ 5,725,000

d. CD unit sales volume required to achieve a profit of $200,000 : 136,719

Step-by-step explanation:

a. Contribution per CD unit:

Contribution = Sales - Variable Costs

= $10.00 - ( $2.25+ $0.35 + $1.00)

= $6.40

b. Break even volume in CD units and dollars

Break even volume in CD units = Fixed Cost / Contribution per unit

= ( $375,000+ $300,000)/ $6.40

= 105,468.75

= 105,469

Break even volume in dollars = Fixed Cost / Contribution Margin Ratio

= ( $375,000+ $300,000)/ ($6.40/ $10.00)

= $1,054,687.50

c. Profit if 1 million CDs are sold

Profit = Contribution - Fixed Costs

= ($6.40 × 1,000,000) - ( $375,000+ $300,000)

= $ 5,725,000

d. CD unit sales volume required to achieve a profit of $200,000

Units to Achieve a Target Profit = Fixed Costs + Target Profit / Contribution per unit

=(( $375,000+ $300,000)+$200,000)+/ $6.40

= $875,000 / $6.40

= 136,718.75

= 136,719