Question

QUESTION 2

1. Hollywood Films International (HFI) markets DVD's and videos through a variety of retail outlets. Presently, HFI is faced with a decision as to whether it should obtain the distribution rights to an unreleased film titled "Touch of Tangerine". HFI estimates the total market for the film to be 100,000 units. HFIs suggested retail price for the DVD (i.e., the price at which the retailer would sell the film to consumers) is $20 per unit. However, the company would need to sell the DVD to retailers with a 30% trade discount.
   Other data available are as follows:

   • Cost of distribution rights for film - $150,000
   • Cost of label design - $5,000
   • Cost of package design - $15,000
   • Cost of advertising - $25,000
   • Cost of reproduction (per copy) - $4.00
   • Cost of manufacture of labels and packaging (per copy) - $1.00
   • Cost of royalties (per copy) - $2.00

   Answer the following questions:

   1. What is the price at which VCI must sell to the retailers?
   2. What is VCI’s unit contribution?
   3. What is the break-even point in units?

   Make sure you are responding to each part of every question. You MUST show your detailed calculations for each question. Partial credit will be given for completing the right steps even if your final answer is incorrect.

Answer 1

1) Selling price to retailers

Retail Selling price to Consumers : $20 / Unit

Trade Discount given to Retailers by Company = 30%

So selling price to Retailers = Retail Selling Price * (100% - Trade discount % )

20 * (100% -30%)

= 20 * 70% = $14 / Unit

2) Unit Contribution (Contribution Margin per Unit)

Unit Contribution = Selling Price per Unit - Total Variable Cost per Unit

Selling Price Per unit = $14

Variable Costs Include

Cost of Reproduction = $ 4 / Unit

Cost of manufacture of labels and packaging = $ 1 /Unit

Cost of royalties = $ 2 /Unit

Total Variable cost per Unit = $4 + $1 + $2 = $ 7

Unit Contribution = $14 - $ 7 = $ 7 /Unit

3) Break-Even point in Units

Break-Even point is a point which all revenues is equal to all cost, In other words operating income will be Zero

Break-even point in Unit = Total Fixed Cost / Contribution Margin per Unit

Contribution Margin per unit = $ 7/ Unit

Fixed Cost include

Cost of distribution rights for film = $150,000

Cost of label design = $5,000

Cost of package design = $15,000

Cost of advertising = $25,000

Total Fixed Cost = 150000+5000+15000+25000 = $ 195000

Break-even point in Unit = 195000 / 7 =27857.14 = 27857 Units