Question

Pricing Assessment

10S-2. Executives of Studio Recordings Inc. produced the latest compact disc by the Starshine Sisters Band, titled Sunshine/Moonshine. The following cost information In Table 1 pertains to the CD:

Table 1

CD Information	Cost
CD package	$1.30/CD
Songwriters’ royalties	$0.40/CD
Recording artists’ royalties	$1.10/CD
Advertising and promotion	$280,000
Studio Recording Inc.’s overhead	$260,000
Selling price to the CD distributor	$9.25

1. Calculate the following figures and complete the Table 2 below for Question 1:
   1. Contribution per CD unit
   2. Break-even volume in CD units and dollars
   3. Net profit if one million CDs are sold
   4. Necessary CD unit volume to achieve a $200,000 profit
2. Recalculate the four figures for a situation in which the selling price to the CD distributor is dropped to $8.00 and complete Table 2 for Question
3. Recalculate the four figures for a situation in which Studio Recording Inc.’s overhead is reduced to $175,000 and complete Table 2 for Question

Table 2

	Question 1	Question 2	Question 3
Contribution per CD unit	Enter figure	Enter figure	Enter figure
Break-even volume in CD units and dollars	Enter figure	Enter figure	Enter figure
Net profit if one million CDs are sold	Enter figure	Enter figure	Enter figure
Necessary CD unit volume to achieve a $200,000 profit	Enter figure	Enter figure	Enter figure

4. If you were tasked to produce $300,000 minimum in profit, what would your pricing recommendation be? Consider the ethical considerations of your decision. Support your recommendation in one to two paragraphs and complete Table 3 with your new recommendations.

Supporting paragraph(s):

Table 3

Type of Cost	Actual Cost	New Recommendation
CD package	$1.30 per CD	To be completed by student
Songwriters’ royalties	$0.40 per CD	To be completed by student
Recording artists’ royalties	$1.10 per CD	To be completed by student
Advertising and promotion	$280,000	To be completed by student
Studio Recording Inc.’s overhead	$260,000	To be completed by student
Selling price to the CD distributor	$9.25	To be completed by student

Answer 1

Ans1: Table 2: Below is the screenshot of Final Answers:

161. Number Questions Contribution per CD Unit Break Even Volume in CD Units Jb2. Break Even Volume in Dollars Net Profit if One Million CDs are sold Necessary CD unit volume to achieve a $200,000 profit Question 1 Question 2 Question 3 6.45 5.2 6.45 83720.93| 103846.151 70542.64 774418.601 830769.231 652519.38 5910000.00 4660000.00 5995000.00 114728.68 142307.69 101550.39

Formulas used to solve the questions are below:

a. Contribution per unit = Selling Price per unit - Variable Cost per unit

b1. Break-Even Volume = Fixed Cost / Contribution per unit

b2. Break-Even Price = Break-Even Volume * Selling Price per unit

c. Net Profit = [(Selling Price per unit - Variable cost per unit) * Sales Volume] - Fixed Cost

d. Unit Volume (To achieve Profit) = (Profit + Fixed Cost) / Selling Price per case

Below are the values used in the above-mentioned formula as per the question:

Question 1:

Selling Price per unit = $ 9.25

Variable Cost per unit = $ 2.8 (1.3 + 0.4 + 1.1)

Fixed Cost = $ 540,000 (280,000 + 260,000)

Sales Volume = $ 1,000,000 (For part c)

Profit = $ 200,000 (For part d)

Question 2:

Selling Price per unit = $ 8

Variable Cost per unit = $ 2.8 (1.3 + 0.4 + 1.1)

Fixed Cost = $ 540,000 (280,000 + 260,000)

Sales Volume = $ 1,000,000 (For part c)

Profit = $ 200,000 (For part d)

Question 3:

Selling Price per unit = $ 9.25

Variable Cost per unit = $ 2.8 (1.3 + 0.4 + 1.1)

Fixed Cost = $ 455,000 (280,000 + 175,000)

Sales Volume = $ 1,000,000 (For part c)

Profit = $ 200,000 (For part d)

Ans 2: If we are asked to make $ 300,000 in profit:

Unit Volume (To achieve Profit) = (Profit + Fixed Cost) / Selling Price per case = (300,000 + 540,000) / 9.25 = 130,233 CDs

Recommendation: At Selling price of $ 9.25 per CD, we can achieve $ 300,000 profit mark by selling 130,233 CDs in the market. If we are seeing more demand for the product at the same price, we can think about reducing the price to achieve the same. On the contrary if the people are willing to pay more the sales volume is not hitting up then we can increase the Selling price to achieve the targeted profit.

Table3:

Number Questions CD package Songwriter's royalties Recording artist's royalties Actual Cost New Recommendation If reduced, Target Sales Volume will also reduce to achieve the Profit. |$ 1.3 per CD if increased, then vise-versa If reduced, Target Sales Volume will also reduce to achieve the Profit. $ 0.4 per CD if increased, then vise-versa If reduced, Target Sales Volume will also reduce to achieve the Profit. $ 1.1 per CD If increased, then vise-versa If reduced, Target Sales Volume will also reduce to achieve the Profit. $ 280000 If increased, then vise-versa If reduced, Target Sales Volume will also reduce to achieve the Profit. $ 260000 If increased, then vise-versa If reduced, Target Sales Volume will also Increase to achieve the Profit. $9.25 If increased, then vise-versa d. Advertising and promotion e. Studio Recording Inc.'s overhead Selling price to the CD distributor