Executives of Studio Recordings, Inc. produced the latest compact disc by the St
ID: 2480814 • Letter: E
Question
Executives of Studio Recordings, Inc. produced the latest compact disc by the Starshine Sisters Band, titled Sunshine /Moonshine . The following cost information pertains to the new CD:
CD package and disc (direct material and labor) $1.25/CD
Songwriters’ royalties $0.35/CD
Recording artists’ royalties $1.00/CD
Advertising and promotion $275,000
Studio Recordings, Inc.’s overhead $250,000
Selling price to CD distributor $9.00
Calculate the following:
a. Contribution per CD unit
b. Break-even volume in CD units and dollars
c. Net profit if 1 million CDs are sold
d. Necessary CD unit volume to achieve a $200,000 profit
Explanation / Answer
a) contribution margin is amount of sale value left after recoverinng variable costs
it can be calculculated as
=Selling price - all variable expenses
Selling price = 9
Less: VAriable expenses
Direct Material and labor = 1.25
Songwriter royaly = 0.35
recording artist royalty = 1.00
Total Variable cost = 2.6
Contribution per cd = 9 - 2.6
= $ 6.4 per CD
b) Breakeven point refers to pint of no profit no loss. i.e. where company recoevrs all its variable and fixed costs only
it can be calculated as = Fixed cost / contribution per unit
Fixed costs
Advertising and promotion = 275000
Studio recording overhead = 250000
Total fixed overhead = 525000
Breakeven units = 525000 / 6.4 , = 82031.25, = 82032 (Rounded off, as cd's can not be produced in fraction)
Breakeven sales in dollar = Breakeven units x selling price
= 82032 x 9 , =738288
c) Net profit if 1 million CDs are sold
Contribution earned on 1 million CDS = 1Million Cds x 6.4 per unit
= 6.4 Million , 6400000
Less: Fixed cost = 525000
Profit = 5875000
d) Desired profit of 200000
it can be calculated usning formula = ( desired profits + fixed costs) / contribution per unit
= ( 200000+525000) / 6.4 ,
= 113281.25 or 113282 CDs ( Rounded off)
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