Question

1. Executives of Studio Recordings, Inc. produced the latest compact disc by the Starshine Sisters Band, titled Sunshine/Moonshine. The following cost information pertains to the new CD: CD package and disc (direct material and labor) Songwriters' royalties Recording artists' royalties Advertising and promotion Studio Recordings, Inc.'s overhead Selling price to CD distributor $1.25/CD $0.35/CD $1.00/CD $275,000 $250,000 $9.00 Calculate the following: a. b. c. d. e. Unit Contribution Break-even volume in CD units Break-even sales volume (in dollars) Net profit if 1 million CDs are sold Necessary CD unit volume to achieve a $200,000 profit

Answer 1

Unit variable cost = CD package and disc + Songwriter's royalties + Recording artists' royalties = $1.25 + $0.35 + $1 = $2.6

Total fixed cost = Advertising and promotion + Studio recordings, Inc.'s overhead = $275,000 + $250,000 = $525,000

(a) Unit contribution margin = Selling price per unit - Unit variable cost = $9 - $2.6 = $6.4

(b) Break-even volume in CD units = Total fixed cost / Unit contribution margin = $525,000 / $6.4 = 82,031.25 units

(c) Break-even sales volume (in dollars) = Total fixed cost * Selling price per unit / Contribution margin per unit = $525,000 * $9 / $6.4 = $738,281.25

(d) Calculation of net profit is 1 million CDs are sold :

	$
sales ( 1,000,000 CD * $9 )	9,000,000
Variable cost ( 1,000,000 CD * $2.6 )	-2,600,000
Contribution margin	6,400,000
Fixed cost	-525,000
Net profit	5,875,000

(e) Required sales units = [ Fixed cost + Target profit ] / Contribution margin per unit = [ $525,000 + $200,000 ] / $6.4 = 113,281.25 units