Questions -
1. 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
Q2. The group product manager for ointments at American Therapeutic Corporation was reviewing price and promotion alternatives for two products: Rash- Away and Red-Away. Both products were designed to reduce skin irritation, but Red-Away was primarily a cosmetic treatment whereas Rash-Away also included a compound that eliminated the rash. The price and promotion alternatives recommended for the two products by their respective brand managers included the possibility of using additional promotion or a price reduction to stimulate sales volume. A volume, price, and cost summary for the two products follows:
Rash-Away Red-Away
Unit price $2.00 $1.00
Unit variable costs 1.40 0.25
Unit contribution $0.60 $0.75
Unit volume 1,000,000 units 1,500,000 units
Both brand managers included a recommendation to either reduce price by 10 percent or invest an incremental $150,000 in advertising.
a. What absolute increase in unit sales and dollar sales will be necessary to recoup the incremental increase in advertising expenditures for Rash-Away? For Red-Away?
b. How many additional sales dollars must be produced to cover each $1.00 of incremental advertising for Rash-Away? For Red-Away?
c. What absolute increase in unit sales and dollar sales will be necessary to maintain the level of total contribution dollars if the price of each product is reduced by 10 percent?