Question

Executives at Sony Records produced the latest CD by Beyonce. The product manager is faced with a profitability and launching issue and wondered if he should proceed. Calculate wholesale selling price of CD to retailers, Sony selling price to of CD to wholesalers, Contribution per CD for Sony, Contribution margin per CD for Sony, Breakeven Unit Sales required by Sony, Breakeven Dollar Sales by Sony, and the profit if 1,500,500 units are sold by Sony. How much would Sony need to sell in dollars to cover $1 additional investment in advertising?

He assumes that:

CD package and disc costs = $2.35 / CD

Songwriter's royalty = $1.85 / CD

Royalties to Beyonce = $1.50 / CD

Ad and Promo = $250,000

Studio recording overhead costs = $350,000

Retail selling price of CD = $35.00

Margin required by Retailers = 33%

Margin required by Wholesales = 15%

Answer 1

Retail selling price of CD = $35.00

Since, retailer margin is 33%, Retailer Price = $35/(1+33%) = $26.32

i.e. whole sale selling price to retailers is $26.32

Since, wholesaler margin is 15%, Wholesaler Price = $26.32/(1+15%) = $22.89

i.e. Sony Selling Price to wholesalers = $22.89

Variable Costs = CD package and disc costs + Songwriter's royalty + Royalties to Beyonce

= $2.35 + $1.85 + $1.50 = $5.7

Contribution per CD = $22.89-$5.7 = $17.19

Contribution Margin ratio per CD = 17.19/22.89 = 75.10%

Breakeven unit sales = Fixed Costs/Contribution per CD

Fixed costs:
Ad and Promo	250000
Studio Recording overhead costs	350000
Total Fixed Costs	600000
Breakeven unit sales (Total Fixed Costs/Contribution per unit)	34905
Break even dollar sales (Breakeven unit sales * Sony selling price)	$600,016.95

If 1,500,500 units are sold by Sony:

Revenue (1500500*22.89)	$34,346,445.00
Costs
Variable Costs (1500500*5.7)	$8,552,850.00
Fixed Costs	$600,000.00
Total Costs	$9,152,850.00
Profit (Revenue – Total Costs)	$25,193,595.00

How much would Sony need to sell in dollars to cover $1 additional investment in advertising?

Amount of dollar sales = additional fixed costs*price per CD/contribution per CD

Amount of dollar sales = $1*22.89/17.19 = $1.33

For any additional investment of $1 in Fixed costs, Sony needs to generate sales of $1.33.