Financial Exercise
Essay Preview: Financial Exercise
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Problem 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
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
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
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%
What is the breakeven point in units? In dollars?
Fixed Costs:
Distribution rights for film
$125,000
Label design
5,000
Advertising
35,000
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
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 required
100,000 (est. Mkt. Size) = .293 or 29.3%
Problem 3
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