Question

MUSICNOW IS A RETAIL STORE THAT SELLS CDS TO CONSUMERS. MUSIC NOW PURCHASES THE CDS IT

SELLS FROM A WHOLESALER WHO BUYS THEM FROM A MANUFACTURER. THE WHOLESALER GETS A 20%

CONTRIBUTION MARGIN ON ITS SELLING PRICE. MUSIC NOW USES COST-PLUS PRICING TO DETERMINE

ITS SELLING PRICE, MARKING UP CDS 40%. IF THE MANUFACTURER SELLS A CD TO THE WHOLESALER

FOR $5, WHAT IS MUSIC NOW’S SELLING PRICE TO CONSUMERS?

Answer 1

MUSICNOW IS A RETAIL STORE THAT SELLS CDS TO CONSUMERS. MUSIC NOW PURCHASES THE CDS IT SELLS FROM A WHOLESALER WHO BUYS THEM FROM A MANUFACTURER. THE WHOLESALER GETS A 20% CONTRIBUTION MARGIN ON ITS SELLING PRICE. MUSIC NOW USES COST-PLUS PRICING TO DETERMINE ITS SELLING PRICE, MARKING UP CDS 40%.

Cost to Wholesaler = $5

Contribution Margin of Wholesaler = 20%

Contribution Margin is defined as percentage or ratio of selling price. Hence, if Wholesaler’s selling price is ‘P’, then

P = 5 + 20%*P

80% * P = 5

P = 6.25

Wholesaler’s selling price = $6.25

i.e. Purchase price of Musicnow retail store is $6.25

Mark up = 40% * Purchase price = 40% * 6.25 = $2.5

Selling Price of Musicnow retail store = $6.25 + $2.5 = $8.75

Musicnow store’s selling price is $8.75