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EXERCISES 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 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, 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 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 VCl'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? b. What 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 VCI's investment the first year? 3. The group product manager for ointments at American Therapeutic Corporation was reviewing price and promotion alternatives for two products: Rash-Away and Red-Away. Both products were designed to reduce skin irritation, but Red-Away was primarily a cosmetic treatment whereas RashAway also included a compound that eliminated the rash. The price and promotion alternatives recommended for the two products by their respective brand managers included the possibility of using additional promotion or a price reduction to stimulate sales volume. A volume, price, and cost summary for the two products follows: Rash-Away Red-Away Unit price $2.00 $1.00 Unit variable costs 1.40 0.25 Unit contribution $0.60 $0.75 Unit volume 1,000,000 units 1,500,000 units Both brand managers included a recommendation to either reduce price by 10 percent or invest an incremental $150,000 in advertising. a. What absolute increase in unit sales and dollar sales will be necessary to recoup the incremental increase in adve1tising expenditures for Rash-Away? For Red-Away? b. How many additional sales dollars must be produced to cover each $1.00 of incremental advertising for Rash-Away? For Red-Away? c. What absolute increase in unit sales and dollar sales will be necessary to maintain the level of total contribution dollars if the price of each product is reduced by 10 percent? 4. After spending $300,000 for research and development, chemists at Diversified Citrus Industries have developed a new breakfast drink. The drink, called Zap, will provide the consumer with twice the amount of vitamin C currently available in breakfast drinks. Zap will be packaged in an 8-ounce can and will be introduced to the breakfast drink market, which is estimated to be equivalent to 21 million 8-ounce cans nationally. One major management concern is the lack of funds available for marketing. Accordingly, management has decided to use newspapers (rather than television) to promote Zap in the introductory year and distribute Zap in major metropolitan areas that account for 65 percent of U.S. breakfast drink volume. Newspaper advertising will carry a coupon that will entitle the consumer to receive $0.20 off the price of the first can purchased. The retailer will receive the regular margin and be reimbursed for redeemed coupons by Diversified Citrus Industries. Past experience indicates that for eve1y five cans sold during the introduct01y year, one coupon will be returned. The cost of the newspaper advertising campaign (excluding coupon returns) will be $250,000. Other fixed overhead costs are expected to be $90,000 per year. Management has decided that the suggested retail price to the consumer for the 8-ounce can will be $0.50. The only unit variable costs for the product are $0.18 for materials and $0.06 for labor. The company intends to give retailers a margin of 20 percent off the suggested retail price and wholesalers a margin of 10 percent of the retailers' cost of the item. a. At what price will Diversified Citrus Industries be selling its product to wholesalers? b. What is the contribution per unit for Zap? c. What is the break-even unit volume in the first year? d. What is the first-year break-even share of market? 6. Max Leonard, vice president of Marketing for Dysk Computer, Inc., must decide whether to introduce a midpriced version of the firm's DC6900 personal computer product line-the DC6900-X. The DC6900-X would sell for $3,900, with unit variable costs of $1,800. Projections made by an independent marketing research firm indicate that the DC6900-X would achieve a sales volume of 500,000 units next year, in its first year of commercialization. One-half of the first year's volume would come from competitors' personal computers and market growth. However, a consumer research study indicates that 30 percent of the DC6900-X sales volume would come from the higher-priced DC6900-Omega personal computer, which sells for $5,900 (with unit variable costs of $2,200). Another 20 percent of the DC6900-X sales volume would come from the economy-priced DC6900-Alpha personal computer, priced at $2,500 (with unit variable costs of $1,200). The DC6900-Omega unit volume is ex-· pected to be 400,000 units next year, and the DC6900-Alpha is expected to achieve a 600,000-unit sales level. The fixed costs of launching the DC6900-X have been forecast to be $2 million during the first year of commercialization. Should Mr. Leonard add the DC6900-X model to the line of personal computers? Why? analysis and negotiations with individuals both inside and outside the company. Discussions with the sales director indicated that 40 percent of the company sales force would be dedicated to selling products of the Home Office Systems group. Sales representatives would receive a 15 percent commission on sales of home office systems. Under the new organizational structure, the Home Office Systems group would be charged with 40 percent of the budgeted sales force expenditure. The sales director's budget for salaries and fringe benefits of the sales force and noncommission selling costs for both the Corporate and Home Office Systems groups was $7.5 million. The advertising and promotion budget contained three elements: trade magazine advertising, cooperative newspaper advertising with Century Office Systems, Inc. dealers, and sales promotion matetials including product brochures, technical manuals, catalogs, and point-of-purchase displays. Trade magazine ads and sales promotion materials were to be developed by the company's advertising and public relations agency. Production and media placement costs were budgeted at $300,000. Cooperative advertising copy for both newspaper and radio use had budgeted production costs of $100,000. Century Office Systems, Inc.'s cooperative advertising allowance policy stated that the company would allocate 5 percent of company sales to dealers to promote its office systems. Dealers always used their complete cooperative advertising allowances. Meetings with manufacturing and operations personnel indicated that the direct costs of material and labor and direct factory overhead to produce the Home Office System product line represented 50 percent of sales. The accounting department would assign $600,000 in indirect manufacturing overhead (for example, depreciation, maintenance) to the product line and $300,000 for administrative overhead (clerical, telephone, office space, and so forth). Freight for the product line would average 8 percent of sales. Blake's staff consisted of two product managers and a marketing assistant. Salaries and fringe benefits for Ms. Blake and her staff were $250,000 per year. a. Prepare a pro forma income statement for the Home Office Systems group given the information provided. b. Prepare a pro forma income statement for the Home Office Systems group given annual sales of only $20 million. c. At what level of dollar sales will the Home Office Systems group break even?

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1. Studio Recordings, Inc.
(a) Contribution per CD unit
Contribution Margin = Revenue - Variable expenses
Contribution Margin = $9 - ($1.25 + $0.35 + $1.00)
Contribution Margin = $9 - $2.60
Contribution Margin = $6.40
(b) Break-even volume in CD units and dollars
Break-even Volume = Fixed Expenses ÷ Contribution Margin per CD
Break-even Volume = ($275,000 + $250,000) ÷ $6.40
Break-even Volume = $525,000 ÷ $6.40
Break-even Volume = 82,035 units
Contribution Margin Ratio
Contribution Margin ÷ Revenue
= $6.40 ÷ $9.00
Contribution Margin Ratio = 71.11%
Break-even Point in sales dollars = Total Fixed Expenses ÷ Contribution Margin Ratio
Break-even Point in sales dollars = $525,000 ÷ 71.11%
Break-even Point in sales dollars = $738,293
(c.) Net profit if 1 million CDs are sold
Net Profit = Revenue - Total Expenses
Net Profit = (1,000,000 x $9.00) - [$525,000 + (1,000,000 x $2.60)]
Net Profit = $9,000,000 - $3,125,000
Net Profit = $5,875,000
(d) Necessary CD unit volume to achieve a $200...

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