Question

Pricing Assessment

10S-2. Executives of Studio Recordings Inc. produced the latest compact disc by the Starshine Sisters Band, titled Sunshine/Moonshine. The following cost information In Table 1 pertains to the CD:

Table 1

CD Information	Cost
CD package	$1.30/CD
Songwriters’ royalties	$0.40/CD
Recording artists’ royalties	$1.10/CD
Advertising and promotion	$280,000
Studio Recording Inc.’s overhead	$260,000
Selling price to the CD distributor	$9.25

1. Calculate the following figures and complete the Table 2 below for Question 1:
   1. Contribution per CD unit
   2. Break-even volume in CD units and dollars
   3. Net profit if one million CDs are sold
   4. Necessary CD unit volume to achieve a $200,000 profit
2. Recalculate the four figures for a situation in which the selling price to the CD distributor is dropped to $8.00 and complete Table 2 for Question
3. Recalculate the four figures for a situation in which Studio Recording Inc.’s overhead is reduced to $175,000 and complete Table 2 for Question

Table 2

	Question 1	Question 2	Question 3
Contribution per CD unit	Enter figure	Enter figure	Enter figure
Break-even volume in CD units and dollars	Enter figure	Enter figure	Enter figure
Net profit if one million CDs are sold	Enter figure	Enter figure	Enter figure
Necessary CD unit volume to achieve a $200,000 profit	Enter figure	Enter figure	Enter figure

4. If you were tasked to produce $300,000 minimum in profit, what would your pricing recommendation be? Consider the ethical considerations of your decision. Support your recommendation in one to two paragraphs and complete Table 3 with your new recommendations.

Supporting paragraph(s):

Table 3

Type of Cost	Actual Cost	New Recommendation
CD package	$1.30 per CD	To be completed by student
Songwriters’ royalties	$0.40 per CD	To be completed by student
Recording artists’ royalties	$1.10 per CD	To be completed by student
Advertising and promotion	$280,000	To be completed by student
Studio Recording Inc.’s overhead	$260,000	To be completed by student
Selling price to the CD distributor	$9.25	To be completed by student

Answer 1

Answers to Q1 :-

Contribution per unit = selling price per unit - variable cost per unit

= 9.25 - 1.30 - 0.40 - 1.10

= 9.25 - 2.80

= 6.45

Break even point in units = Fixed cost / contribution per unit

= (280000 + 260000) / 6.45

= 83721 CDs

Break even point in dollar = Fixed cost / PV Ratio

= 540000 / (6.45 /9.25)

= 540000 * 9.25 / 6.45

= $774419/-

Net profit = Sales - Variable cost - Fixed cost

= 1000000*9.25 - 1000000*2.80- 540000

= 9250000 - 2800000 - 540000 = $5910000 /-

CD unit to achieve profit of 200000 =

(Fixed cost + Profit)/Contribution per unit

= (540000 + 200000) / 6.45 = 740000 / 6.45 = 114729 CDs

If the selling price falls down to $ 8

Contribution per unit = 8 - 1.30 - 0.40 - 1.10

= 5.20

Break even voulme in unit = 540000 / 5.20 = 103846

Break even volume in dollar = 540000 * 8 / 5.20 = 830768

Net profit = 1000000 * 8 - 1000000 * 2.80 - 540000 = $4660000 /-

CD units to achieve profit of 2 lakhs = (540000 + 200000) / 5.20

= 142308 CDs

Overhead reduced to 1,75,000

Contribution per unit will remain same = 6.45

Break even volume in units = (280000 + 175000)/ 6.45

= 70543 CDs

Break even volume in dollars = 70543 * 9.25 = $652523/-

Net profit = 1000000 * 9.25 - 1000000*2.80 - 455000 = $ 5995000 /-

Units required for profit of 200000 =( 455000 + 200000 ) / 6.45

= 655000 / 6.45 = $101550 /-