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
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