1. Motion Music is doing a financial feasibility analysis for a new album. Recor
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1. Motion Music is doing a financial feasibility analysis for a new album. Recordings and production are estimated at $65,000. The printing of CDs is fixed at $5000 for set up plus $3 per CD. The artist's royalty is 4% per CD of the publisher's price to music stores. Advertising and promotion costs are budgeted at $9,000 (a) If the price to music stores is set at $21, how many CDs must be sold to break even? Find the break-even point algebraically and by using an EXCEL graph. Attach the printout or copy your EXCEL graph into your assignment submission EXCEL Instructions: Create a column called Number of CDs and in that column enter values from 0 to 5,000 in increments of 500. Then create two more columns, one for Total Cost and another for Total Revenue. Enter appropriate formulae in EXCEL to obtain the total cost and total revenue corresponding to each value in the Number of CDs column. Highlight the resulting three sets of numbers and go to the Insert tab (or Chart menu) to obtain an appropriate diagram Make sure that your graph has been labelled appropriately i.e. title, axis labels, legend). Refer to Topic 3 in the EXCEL Supplement for further instructions on entering formulae and graphing in EXCEL (b) The marketing department is forecasting sales of 5,000 CDs at the price of $21. Based on your graph from part (a), will there be a net profit or net loss from the project at this volume of sales? How do you know? Calculate this net profit or loss amount. (Assume no tax costs.) (c) If the artist requires an increase in royalty to 7%, how does this impact Motion Music? Assuming the fixed costs and the selling price remains as in (a), explain in a short paragraph (3- 4 sentences) whether the number of CDs required to break-even will increase or decrease. Do ant for this question however you may qu ote the break- even formula to aid your explanation. (d) The marketing department is also forecasting that if the price is reduced by 5% then unit sales will be 10% higher. Should Motion Music continue with the original price in (a) or this reduced price? Show calculations that support your recommendation. Assume initial fixed and variable cost estimatesExplanation / Answer
a.) Let, the number of CDs to be sold to break even be x units.
Cost Components:
Fixed:
Recording and production costs= $65000
Printing= $5000
Advertising and promotion=$9000
Variable cost:
Set up= $3 per CD= $3x
Artist Royalty= $21x * 4%= $0.84x
Total= $3.84x
Cost Structure:
Sales $21x
Less:Variable Cost ($3.84x)
Contribution $17.16x
Less: FIxed Cost 79000
Break even= Fixed cost/ Contribution per unit
or, x=79000/17.16x
or, x square= 79000/17.16
or, x= 68 units
Break even= (79000-77220)/(85800-77220)*500 + 4500 = 4603 units.
b.) If the firm expects 5000 units to be estimate.
c.
If the royalty increases to 7% , then there will be net loss of $550
d. If Price reduced by 5% and sales units increases by 10%:
79000
100120
88605
Breakeven units= (79000-70884/79774-70884)*550+ (4400)= 4902 units
Number of CDs Total Cost Total Revenue Contribution Fixed Cost 500 1920 10500 8580 79000 1000 3840 21000 17160 79000 1500 5760 31500 25740 79000 2000 7680 42000 34320 79000 2500 9600 52500 42900 79000 3000 11520 63000 51480 79000 3500 13440 73500 60060 79000 4000 15360 84000 68640 79000 4500 17280 94500 77220 79000 Break even pointbetween these two 5000 19200 105000 85800 79000
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