Question

A music company sells CDs for a particular artist. The company has advertising cost of $4,000 and recoding costs of $10,000; Their cost for manufacturing, royalties, and distribution are $5.50 per CD. They sell the CDs to Mage-Mart for $7.20 each

Answer 1

Instructions are below.

Explanation:

Giving the following information:

Fixed costs= 4,000 + 10,000= $14,000

Unitary variable cost= $5.5

Selling price= $7.2

To calculate the number of units to be sold to break-even, we need to use the following formula:

Break-even point in units= fixed costs/ contribution margin per unit

Break-even point in units= 14,000 / (7.2 - 5.5)

Break-even point in units= 8,235 units

In dollars:

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point (dollars)= 14,000 / (1.7/7.2)

Break-even point (dollars)= $59,294

Now, imagine the company requires a profit of $50,000:

Break-even point in units= (fixed costs + desired profit) / contribution margin per unit

Break-even point in units= 64,000/1.7

Break-even point in units= 37,647 units

Break-even point (dollars)= (fixed costs + desired profit) / contribution margin ratio

Break-even point (dollars)= 64,000 / (1.7/7.2)

Break-even point (dollars)= $271,059