Problem 1

1. Calculate the contribution per CD unit Selling price to CD distributor $9.00 Less: Variable cost CD Package and disk (direct material/labor) $1.25/unit Songwriter’s royalties $0.35/unit Recording artists’ royalties $1.00/unit

Total variable cost 2.60 Contribution per CD unit $6.40

2. Calculate the break-even volume in CD units and dollars

Total Fixed Cost: Advertising and promotion $275,000 Studio Recordings, Inc. overhead 250,000 Total $525,000

Contribution per CD unit (from #1 above) $6.40

Contribution margin ($9.00-$2.60)/$9.00=.711 or 71.1%
At what price will diversified Citrus Industries be selling their product to wholesalers?

Retail Price to Consumer 50¢ -20% margin (10¢)

Retail Cost/Wholesaler Price 40¢

-10% margin (4¢)
Wholesaler Cost/Manufacturer Price 36¢

2. What is the contribution per unit for ZAP?

Unit Selling Price = $.36

Unit Variable Costs:

Material $.18 Labor .06 Coupon .04 .28 (1/5 x 20¢ = 4¢)

Contribution per unit = $.08

3. What is the break-even unit volume in the first year?

Total Fixed Costs:

Advertising $250,000 Overhead 90,000 $340,000

Contribution per unit $.08 $340,000
Break-even Unit Volume = $.08 = 4,250,000 units

Note: Students should not include the $300,000 for research and development. This cost is a sunk cost.

4. What is the first year break-even share-of-market?

Total U.S. Market Size = 21 million 8-oz. cans

Market Served by Marketing Program = 65% of U.S.

Therefore, .65 x 21 million = 13,650,000 8-oz. cans

First year break-even share-of-market is:

Break-even Unit Volume 4,250,000 Market Served Size = 13,650,000 = .31 or