Advanced Electronics manufactures DVDs and sells them direct

Advanced Electronics manufactures DVDs and sells them directly to retailers who typically sell them for $20. Retailers take a 40% margin based on the retail selling price. Advanced\'s cost information is as follows:

Solution

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But I think question is like :

Calculate the following:
a. contribution per unit and contribution margin
b. break-even volume in DVD units and dollars
c. volume in DVD units and dollar sales necessary if Advanced’s profit goal is 20 percent profit on sales
d. net profit if 5 million DVDs are sold

a)

first we need to find the contribution per unit

we know that

Unit contribution = selling price - unit variable cost For selling price,

Selling price = retail cost - (retail cost X retailer margin in percentage) = $20 - ($20 X 0.4) = $20 - $8 = $12

variable costs = DVD package + Royalty = $2.50 + $2.25 = $4.75

so we can say that,

Unit contribution = $12 - $4.75 = $7.25

ii)

Contribution margin = unit contribution / price = $7.25 / $12 = 0.604 = 60.4%

b)

Breakeven volume in units = Fixed cost / unit contribution

Fixed cost = Advertising and promotion + overhead = $500,000 + $200,000 = $700,000

unit contribution = $7.25 so,

Breakeven volume in units = $700,000/$7.25 = 96,552 units

Breakeven volume in dollars = Breakeven volume in units X selling price = 96,552 units X $12= $1, 158,624

c)

as given Advanced’s profit goal is 20 percent profit on sales = 0.2 on sales

Unit volume = Fixed price / (Price – variable cost - 0.2 X Selling Price )

price - variable cost -0.2Xselling price = $12 - $4.75 -0.2*$12 = $7.25 - 2.4 = $4.85

Unit volume = $700,000/$4.85 = 144,330

Unite volume in dollars = Unit volume in DVD X selling privce = 144,330 X $12 = $1,731,960

d)

If 5 million units are sold, the profit would be 7.25(5,000,000) - fixed cost

profit = $7.25(5,000,000) - $700,000 = 36,250,000 - 700,000 = $35,550,000.