Question

QUESTION 1

1. RCA Records produced the latest compact disc by the Buffett Brothers, titled "If the Phone Doesn't Ring, It's Me." The following cost information pertains to the new CD:

   • CD package and disc - $0.75/CD
   • Direct labor - $1.00
   • Artists’ and writers' royalties - $1.50/CD
   • Advertising and promotion - $275,000
   • Annual rent for studio - $60,000
   • Studio Recordings, Inc., overhead - $200,000
   • Selling price to CD distributor - $12.00

   Calculate the following:

   1. Contribution per CD unit
   2. Break-even volume in CD units
   3. Net profit if 1 million CDs are sold
   4. Necessary CD unit volume to achieve a $500,000 profit   

   Make sure you are responding to each part of every question. You MUST show your detailed calculations for each question. Partial credit will be given for completing the right steps even if your final answer is incorrect.

Answer 1

Answer:

Variable Cost per CD (V) = CD package and disc + Direct Labor + Artists' and writers' royalties = 0.75 + 1.00 + 1.50 = $3.25

Fixed Cost (F) = Advertising and Promotion + Annual rent for studio + Studio Recording Inc., overhead = 275000 + 60000 + 200000 = $535000

Selling Price (S) = $12

1. Contribution per CD unit = Selling Price (S) - Variable Cost per CD (V) = 12 - 3.25 = $ 8.75

2. Break-even volume in CD units

Break-even volume = Fixed Cost / Contribution per CD unit = 535000/8.75 = 61142.86 ~ 61143 units

3. Net profit if 1 million CDs are sold

Net Profit = Volume*Contribution per CD unit - Fixed Cost = 1000000*8.75 - 535000 = $8215000

4. Necessary CD unit volume to achieve a $500000 profit

Necessaty CD unit volume = (Profit + Fixed Cost)/Contribution per CD unit = (500000 + 535000)/8.75 = 118285.73 ~ 118286 units