Question

3. Focus Features (Focus) markets video equipment and movies through a variety of retail outlets. Presently, Focus is faced with a decision as to whether it should obtain the distribution rights to an unreleased film titled, Harriet. If this film is distributed by Focus directly to large retailers, its investment in the project would be $150,000. Focus estimates the total market for the film to be 100,000 units. Other data available are as follows: Cost of distribution rights for film Label design Package design Advertising Reproduction of copies (per 1,000) Manufacture of labels and packaging (per 1,000) Royalties (per 1,000) $125,000 5,000 10,000 35,000 4,000 500 500 Focus' suggested retail price for the film is $20 per unit. The retailer's margin is 40 percent. a) What is Focus' unit contribution and contribution margin? b) What is the breakeven point in units? In dollars? c) What share of the market would the film have to achieve to earn a 20 percent return on Focus' investment the first year?

Answer 1

a)	Calculate the Focus unit contribution and contribution margin :
	variable cost :
	Cost of distribution rights for film	$ 125,000
	Label design	$ 5,000
	Package Design	$ 10,000
	Reproduction of copies { (100,000 units / 1000 unit)* $ 4,000}	$ 400,000
	Manufacture of labels and packaging {(100,000 units /1000 units )*$ 500 }	$ 50,000
	Royalties { (100,000 units /1000 units )* $ 500 }	$ 50,000
	Total variable cost	$ 640,000
	Variable cost per unit = Total variable cost /Number of units
	Variable cost per unit = $ 640,000 / 100,000 units
	Variable cost per unit = $ 6.40 per unit
	Focus selling price per unit = $ 20 - ( $ 20 * 40% ) = $ 12
	Contribution per unit = selling price per unit - variable cost per unit
	Contribution per unit = $ 12 - $ 6.40
	Contribution per unit = $ 5.60 per unit
	Contribution margin = (Selling price per unit - variable cost per unit )/ Selling price per unit
	Contribution margin = ($ 12 - $ 6.40 ) / $ 12
	Contribution margin = 46.67 ( rounded to 2 decimals)
b)	Calculate the Break even point in units and in dollars :
	Break even point ( in units ) = Fixed cost / contribution margin per unit
	Break even point ( in units ) =   $ 150,000 / $ 5.60 per unit
	Break even point ( in units ) =   26,785.71 units ( rounded to 2 decimal )
	Break even point ( in dollars ) = Break even point ( in units ) * selling price per unit
	Break even point ( in dollars ) = 26,785.71 units * $ 12 per unit
	Break even point ( in dollars ) = $ 321,428.52 ( rounded to 2 decimal )
c)	share of market would the film have to achieve to earn 20 % return on focus 's investment the first year :
	Focus's Return on investment = 20 %
	Return on investment = $ 150,000 * 20 % = $ 30,000
	Retailer margin is 40 percent
	Margin = (100,000 units * $ 20 per unit * 40 % ) = $ 800,000
	Return on investment = margin * Turnover
	so, Turnover = Return on investment / Margin
	Turnover = $ 30,000 / $ 800,000
	Turnover = $ 0.0375 per unit
	Turnover for 100,000 units = ($ 0.0375 per unit * 100,000 units) = 3,750 units
	Share of marketing in the first year = (3,750 units / 100,000 units)* 100 = 3.75 %
	So, share of marketing in the first year = 3.75 %