(Solved Homework): To generate more viewership and sales, Simon Fuller, the original creator of American Idol, planned a 15-year commemorative DVD with…

To generate more viewership and sales, Simon Fuller, the original creator of American Idol, planned a 15-year commemorative DVD with the best and worst auditions of the first 15 seasons. Viewers would vote on what to include and the DVD would be released in 2018. Marketing analysts have estimated that 375,000 DVDs would be sold. Fuller will produce the DVD and sell it to retailers. If Fuller goes through with the plan, he will need to invest $1,500,000 to develop and produce the audience voting and develop the distribution channel. Other costs are as follows:

cost of distribution rights $125,000
label design $10,000
advertising $25,000
reproduction of copies (per 1,000) $2,450,000
package design $400
manufacture of labels and packaging (per 1,000) $175
royalties (per 1,000) $1200

The suggested retail price for the DVD is $9.99 per unit. The retailer’s margin is 40%.

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1. What is the DVD’s unit contribution and contribution margin for Fuller?

2. What is the break-even point in units? In dollars?

3. Assume that sales meet the expected forecast. What is the dollar amount of net profit/loss after accounting for Fuller’s investment?

4. If sales meet the expected forecast, what is Fuller’s ROI?

Expert Answer

 

(A) Total sales revenue

i. Retail Price of DVD = $9.99/unit

ii. Retailer’s Margin = 40%

iii. Selling price of Fuller = (9.99*100)/140 = $7.135

iv. Total sales revenue = 375,000*(9.99*100)/140 = $2,675,893

(B) Total Fixed cost

i. Audience voting & distribution channel = $1,500,000

ii. Cost of distribution rights = $125,000

iii. Label designing = $10,000

iv. Advertising cost = $25,000

v. Package designing = $400

Total fixed cost = $1,660,400

(C) Total Variable Cost for 375,000 copies

i. Reproduction of copies = ($2,450/1000)*375,000 = $918,750

ii. Manufacture of label & packaging = ($175/1000)*375,000 = $65,625

iii. Royalties = ($1200/1000)*375,000 = $450,000

Total Variable Cost = $1,434,375

Per Unit Variable cost = TVC/ Unit produced = 1,434,375/375,000 = $3.825

1. Per Unit contribution of DVD = Per unit sale price – Per unit variable cost = 7.135-3.825 = 3.310

Contribution margin for Fuller = Total sales Revenue – Total Variable cost = $1,241,518

2. Break even point in units = Total fixed cost / Contribution per unit = 501,632

Break even point in Dollars = Sale price per unit * BEP in units = 501,632*7.135 = $3,579,144

3. Net profit/loss = Total revenue – Total cost = 2,675,893 – (1,660,400+1,434,375) = $(418,882)

Fuller will incurr a loss of $418,882

4. Return on investment = (Net profit/Total investment)*100 = [(418,882)/3,094,775]*100 = 13.54%

The ROI is negative as Fuller has incurred a loss on his investment.

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