Video Concepts INC VCI markets video equipment and film through a variety of ret

Question

Video Concepts INC VCI markets video equipment and film through a variety of retail outlets. presently VCI is faced with a decision as to whether it should obtain the distribution rights to an unreleased film titled Touch of Orange. If this file Is distributed by VCI directly to large retailers, VCI's investment in the project would be $150,000. VCI estimates the total market for the film to be 100,000 units. Other data as follows....

Cost of distribution rights for film          $125,000

Label Design                     $5,000

Package Design                  $10,000

Advertising                       $35,000

Reproduction of copies (per 1,000)          $4,000

Manufacture of labels and packing (per 1,000)        $500

Royalties (per 1,000)                 $500

VCI's suggested retail price for the film is $20 per unit. THe retailers margin is 40 percent.

What share of the marketing would the film have to achieve to earn a 20 percent return on VCI's Investment the first year?

Explanation / Answer

Return on investment 20% ROI = $150,000*20% = $30,000 Retailer margin is 40 per cent Margin = (100,000*$20) =$20,00,000*40% =$800,000 ROI = Margin * Turn over Turn over = $30,000/$800,000 =0.0375 per unit Turn over for 100,000 units = 0.0375*100,000 = 3,750 units Share of marketing in the first year = 3,750/100,000 = 3.75%

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