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

Table 2

	Question 1	Question 2	Question 3
Contribution per CD unit	$ 6.45	$ 5.2	$ 6.45
Break-even volume in CD units and dollars	83,721 units (rounded off) $774,419	103,846 units (rounded off) $830,768	70,543 units (rounded off) $652,523
Net profit if one million CDs are sold	$5,910,000	$4,660,000	$5,995,000
Necessary CD unit volume to achieve a $200,000 profit	114,729 units (rounded off)	142,308 units (rounded off)	101,550 units (rounded off)

Table 3

Type of Cost	Actual Cost	New Recommendation
CD package	$1.30 per CD	$1.30 per CD because it is assumed that CD package is the cost paid to supplier.
Songwriters’ royalties	$0.40 per CD	$0.4 per CD because it is assumed that the royalty has been fixed according to the agreement and it can't be altered.
Recording artists’ royalties	$1.10 per CD	$1.10 per CD because it is assumed that the royalty has been fixed according to the agreement and it can't be altered.
Advertising and promotion	$280,000	$280,000
Studio Recording Inc.’s overhead	$260,000	$260,000
Selling price to the CD distributor	$9.25	If production is equal to 130233 units, being the break even for reaching expected profit of $300,000, then Selling price should be $9.25, but if the studio wants to reduce the production, then selling price should be increased accordingly and vice versa.