Question

Video Concepts, Inc. (VCI) markets independently produced films on DVDs through a variety of video retail outlets. VCI is deciding whether they should obtain the rights to a film titled Burnt Orange Forever. VCI estimated the total market for the film will be 100,000 units.

Other data available:

Distribution rights for the film: $100,000.00

DVD Label design: $5,000.00

DVD Package design: $10,000.00

Advertising: $35,000.00

Reproduction of copies: $4,000.00 per 1,000 units

Manufacture of packaging: $750.00 per 1,000 units

Royalties: $500.00 per 1,000 units

DVD Shipping Costs: $1 per unit

VCI's suggested retail price for the film is $20/unit and the retailer's margin is 50%. (There are no other channel intermediaries such as wholesalers to consider.)

1. VCI is considering a shift to digital distribution, replacing DVD production with digital downloads. Calculate the breakeven units (downloads) required given the following data:

• Lower retail price of $15.00
• Digital distribution retailers (iTunes, Amazon) will require a 25% margin
• VCI will sill need to pay distribution rights for the film, as well as royalites for each download.
• VCI will still need to design a digital "poster" for the film, costing $5,000.
• VCI will not need to produce DVDs, design/manufacture packaging, or ship DVDs
• As there will not be brick-and-mortar retail outlets, a higher level of advertising will be necessary: $50,000.00

Answer 1

Sales/ retail price = $15

Margin of digital distribution retailer = 25% = $15 × 25% = $3.75

Fixed cost = distribution rights + digital poster + advertising

= $100000 + $5000 + $50000

= $155000

Variable cost = retailers margin + royalties = $3.75 + $0.5 = $4.25

Contribution per unit = Sell price - variable cost = $15 - $4.25 = $10.75

Break even units = Fixed cost/contribution per unit

= $155000/$10.75

= 14418.6 units or 14419 units