Chapter 2

Chapter 2

Marketing Metrics Sample questions and answers

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) $1.25/CD

Songwriters' royalties $0.35/CD

Recording artists' royalties $1.00/CD

Advertising and promotion $275,000

Studio Recordings, Inc.'s overhead $250,000

Selling price to CD distributor $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

a. Contribution per CD unit Contribution = selling price - variable cost

Selling price to CD distributor 9.00

less: Variable cost

Direct material/labor 1.25

Songwriter's royalties 0.35

Recording artist's royalties 1.00

Total variable cost per unit 2.60

Contribution per CD unit 6.40

b. Break-even volume in CD units and dollars

Fixed cost:

Advertising 275,000

Studio overhead 250,000

Total 525,000

Unit Contribution (from a. above) 6.4

Break-even Units = Fixed Cost/Unit Contribution Margin 82,031.25

Percentage contribution margin (PCM) 0.71

Break-even dollars = Fixed Cost/PCM $ 738,281.25

c. Net profit if 1 million CDs are sold

Sales Units 1,000,000

Sales $ 9,000,000

Total Variable Cost 2,600,000

Total Fixed Costs (from b. above) 525,000

Net Profit 5,875,000...