Question

Mikey W. Smitty, an emerging rapper, is getting ready to cut his first CD, called "Western Rap." He is looking for a production company to produce his "Western Rap" CD. Mikey W. Smitty is confident that demand for his "Western Rap" CD will substantially exceed the break even point of 500CDs or $7,500 in sales. Studio A charges $10,800 to record the CD and $9.50 per CD to duplicate it. Studio B charges only $7,500 to record the CD, but $11.50 per CD for duplication. The CD will sell for $21.50.
What is the breakeven point for Studio A? (Round answer to 2 decimal places, the tolerance is +/- 1). The breakeven point for Studio A is___________ CDs.


Compare Studio A and B. At what volume of demand should Studio A be chosen? (Round answer to the nearest whole number, the tolerance is +/- 1).


If sales()________ than(amount of units)_________ we should choose Studio A.

Answer 1

Answer:

(i) 900 CDs

(ii) Greater than; $1,650

Explanation:

(1) Break-event point will be when the contribution margin from total sales is equal to fixed costs,

Contribution Margin = Selling price - variable cost

                                  = $(21.5 - 9.5)

                                  = $12

Contribution Margin *Number of CDs sold = $10,800

Break-even point for Studio A = 10,800 ÷ 12

                                                    = 900 CDs

(2) Studio A would be more profitable when the extra profit earned from per unit sale of CD exceeds the extra fixed cost given in Studio A.

Extra Contribution margin in Studio A = $(12-10)

                                                               = $2

Extra Fixed cost in Studio A = $(10,800 - 7,500)

                                               = $3,300

Studio A should be chosen if sales is greater than (3300/2) = $1,650.