1. Executives of Studio Recordings, Inc. produced the latest compact disc by the

Question

1. 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) Songwriters' royalties Recording artists' royalties Advertising and promotion Studio Recordings, Inc.'s overhead Selling price to CD distributor $1.25/CD $0.35/CD $1.00/CD $275,000 $250,000 $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

Requirement a Selling price to CD distributor $9.00 Variable Cost: CD package and disc. (direct material and labor) $1.25 Songwriters royalties $0.35 Recording artists' royalties $1.00 Total variable cost $2.60 Contribution per CD unit $6.40 Requirement b Breakeven volume in CD units = Fixed costs/ Contribution per CD unit      = (275,000+250,000)/$6.40     = 82,031.25 or 82,031 Breakeven volume in dollars = Breakeven volume in CD units X selling price per CD unit      = 82,031 X $ 9.00      = $ 738,279 Requirement c Sales (1,000,000*$9.00) 9000000 Variable cost (1,000,000*$2.60) 2600000 Contribution Margin 6400000 Fixed Costs 525000 Net profit 5875000 Requirement d Target profit 200000 Add: Fixed cost 525000 Required Contribution Margin 725000 CD units must sell (725000/6.40) 113281

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