2. Video Concepts, Inc. (VCI) markets video equipment and film through a variety
ID: 2813671 • Letter: 2
Question
2. 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 film is distributed by VCI directly to large retailers, yCI's investment in the project would be $150,000. yCI estimates the total market for the film to be 100,000 units. Other data available are as follows: Cost of distribution rights for film Label design Package design Advertising Reproduction of copies (per 1,000) Manufacture of labels and packaging (per 1,000) Royalties (per 1,000) $125,000 5,000 10,000 35,000 4,000 500 500 VCI's suggested retail price for the film is $20 per unit. The retailer's margin is 40 percent. a. What is VCI's unit contribution and contribution margin? hat is the break-even point in units? In dollars? c. What share of the market would the film have to achieve to earn a 20 percent return on VC I's investment the first year?Explanation / Answer
Solution:
a) Unit Contribution= unit selling price - unit variable cost
computation of unit selling price = Retail price - Retailers margin
Unit selling price = 20 - 20*0.40=$12
Computation of unit variable cost:
Reproduction of copies per unit 4000/1000= $4
Manufacture of labels and packaging 500/1000=$0.50
Royalties 500/1000=$0.50
Total variable cost per unit = 4+0.50+0.50=$5
Unit Contribution= $12-$5=$7
Contribution Margin= unit contribution / selling price
Contribution Margin = 7/12= 58.33%
b) Break even point in units = Total fixed cost / contribution per unit
Total fixed cost = cost of distribution rights+label design+package design+ advertising
Total fixed cost = $1,25,000+$5000+$10,000+$35,000=$1,75,000
Break even point in units = $1,75,000/$7= 25000 units
Break even point in dollars = 25000*12= $3,00,000
c) VCI's Investment = $1,50,000
Profit goal on VCI's Investment = $1,50,000*20%= $30,000
Share of the market to achieve target = Fixed cost + profit goal/ contribution per unit
Share of the market to achieve 20% return on VCI's investment first year = $1,75,000+$30,000/$7 = 29285.71 units.
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