Question

Quality Data manufactures two products, CDs and DVDs, both on the same assembly lines and packaged 10 disks per pack. The predicted sales are 400,000 packs of CDs and 500,000 packs of DVDs. The predicted costs for the year 2009 are as follows:

	Variable Costs	Fixed Costs
Materials	$200,000	$600,000
Other	350,000	600,000

Each product uses 50 percent of the materials costs. Based on manufacturing time, 40 percent of the other costs are assigned to the CDs, and 60 percent of the other costs are assigned to the DVDs. The management of Quality Data desires an annual profit of $50,000.

(a) What price should Quality Data charge for each disk pack if management believes the DVDs sell for 20 percent more than the CDs? Round answers to the nearest cent.
CDs $Answer
DVDs $Answer

(b) What is the total profit per product using the selling prices determined in part (a)? Use negative signs with answers, if appropriate.
CDs $Answer
DVDs $Answer

Answer 1

a. Price per disk

Total costs = Total variable costs + Total fixed costs = ( $200,000 + $350,000 ) + ( $600,000 + $600,000 ) = $1,750,000
Desired annual profit = $50,000
Total revenue to be generated from both the disks combined = Total costs + Desired Profit = $1,750,000 + $50,000 = $1,800,000

CDs sold = 400,000 packs of 10 disks each = 4,000,000 disks
DVDs sold = 500,000 packs of 10 disks each = 5,000,000 disks.

Selling price of each disk of DVD = 1.2 times of selling price of each disk of CD

If CD sells for x.
Then DVD sells for 1.2x.

Total revenue to be generated = Revenue from CDs + Revenue from DVDs
where, Revenue from CDs = Selling price * 4,000,000 = x * 4,000,000 = 4,000,000x
Revenue from DVDs = Selling price * 5,000,000 = 1.2x * 5,000,000 = 6,000,000x
Total revenue = $1,800,000 (calculated at the top)

$1,800,000 = 4,000,000x + 6,000,000x

10,000,000x = $1,800,000
x = $0.18 per disk.
Selling price of each disk of CD = x = $0.18

Selling price of each disk of DVD = 1.2x = $0.18 * 1.2 = $0.216 or $0.22.

b.

S. No.	Particulars	CDs	DVDs
a.	Selling price per disk	$0.18	$0.22
b.	Materials costs	$400,000	$400,000
c.	Other costs	$380,000	$570,000
d.	Total costs ( b + c )	$780,000	$970,000
e.	Disks sold	4,000,000	5,000,000
f.	Cost per disk ( d / e )	$0.195	$0.194
g.	Total profit per product ( a - f )	-$0.015	$0.026

Materials costs = Variable materials costs + Fixed materials costs = $200,000 + $600,000 = $800,000

As each product uses 50% of materials.
Therefore, Materials costs for CDs = Total materials costs * 50% = $800,000 *50% = $400,000
Materials costs for DVDs = Total materials costs * 50% = $800,000 *50% = $400,000

Total Other costs = Variable other costs + Fixed other costs = $350,000 + $600,000 = $950,000
Other costs for CDs = 40% of total other costs = $950,000 * 40% = $780,000
Other costs for DVDs = 60% of $950,000 = $570,000.