Sunk Costs

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PROBLEM 2: VIDEO CONCEPTS, INC. (A)

Purpose

The purpose of this problem is to introduce students to distinctions among

investment, fixed, and variable costs in the context of calculating contribution margins, breakeven points, and market share requirements. As such, it is similar to problems 1 and

4.

Assignment

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What is VCrs unit contribution and contribution margin?

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Selling price for VCI:

$20.00 - 8.00 $12.00

Suggested retail price Retailer margin (40% of suggested retail price)

Variable cost per unit

Copy Reproduction ($4,000/1000) Label & Package Mfg. ($500/1000)

$4.00

.50 .50

Royalties ($500/1000)

Total variable cost per unit

$5.00

Unit contribution Contribution margin

= =

$12.00- $5.00 = $7.00

$7.00 $12.00

= .583 or 58.3%

8

2. What is the breakeven point in units? In dollars? Fixed Costs:

Distribution rights for film

Label design Advertising Package design

$125,000

5,000 35,000 10,000

$175,000

Breakeven points in units -

$175,000

$7.00

- 25,000 units

Breakeven points in dollars -

$175,000

.583

- $300,172

+

What share of the market would the film have to achieve to earn a 20 percent return on VCI's investment the first year?

20 percent return first year

$150,000 (investment) x .20 = $30,000

Fixed cost plus required return

$175,000 + $30,000 = $205,000

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Units required to achieve return

$205,000

$7.00

= 29,286 units

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Market share required

29,286 (B/E Unit Volume) = .293 or29.3% 100,000 (Est. Mkt. Size)

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PROBLEM 4: DIVERSIFIED CITRUS INDUSTRIES

Purpose

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i The purpose of this problem is to provide a straightforward exercise dealing with (a)

trade margins, (b) the determination of variable costs, particularly coupons, (c) breakeven analysis as it relates to relevant and sunk costs, and (d) break-even share of market when the "served market" is a consideration.

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Assignment

1. At what price...