Problem:
Video Concepts, Inc. (VCI) markets video equipment and film through a variety of retail outlets. Presently, VCI is faced with a decision as to whether it should obtain the distribution rights to an unreleased film titled Touch of Orange. If this film is distributed by VCI directly to large retailers, VCI's investment in the project would be $150,000. VCI estimates the total market for the film to be 100,000 units. Other data available are as follows:
Cost of distribution rights for film
$125,000
Label design
5,000
Package design
10,000
Advertising
35,000
Reproduction of copies (per 1,000)
4,000
Manufacture of labels and packaging (per 1,000)
500
Royalties (per 1,000)
500
VCI's suggested retail price for the film is $20 per unit. The retailer's margin is 40 percent.
What share of the market would the film have to achieve to earn a 20 percent return on VCI's investment the first year?