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3. Focus Features (Focus) markets video equipment and movies through a variety of retail outlets. Presently,...

Question:

3. Focus Features (Focus) markets video equipment and movies through a variety of retail outlets. Presently, Focus is faced w

3. Focus Features (Focus) markets video equipment and movies through a variety of retail outlets. Presently, Focus is faced with a decision as to whether it should obtain the distribution rights to an unreleased film titled, Harriet. If this film is distributed by Focus directly to large retailers, its investment in the project would be $150,000. Focus estimates the total market for the film to be 100,000 units. Other data available are as follows: Cost of distribution rights for film Label design Package design Advertising Reproduction of copies (per 1,000) Manufacture of labels and packaging (per 1,000) Royalties (per 1,000) $125,000 5,000 10,000 35,000 4,000 500 500 Focus' suggested retail price for the film is $20 per unit. The retailer's margin is 40 percent. a) What is Focus' unit contribution and contribution margin? b) What is the breakeven point in units? In dollars? c) What share of the market would the film have to achieve to earn a 20 percent return on Focus' investment the first year?

Answers

a) Calculate the Focus unit contribution and contribution margin :
variable cost :
Cost of distribution rights for film $ 125,000
Label design $ 5,000
Package Design $ 10,000
Reproduction of copies { (100,000 units / 1000 unit)* $ 4,000} $ 400,000
Manufacture of labels and packaging {(100,000 units /1000 units )*$ 500 } $ 50,000
Royalties { (100,000 units /1000 units )* $ 500 } $ 50,000
Total variable cost $ 640,000
Variable cost per unit = Total variable cost /Number of units
Variable cost per unit = $ 640,000 / 100,000 units
Variable cost per unit = $ 6.40 per unit
Focus selling price per unit = $ 20 - ( $ 20 * 40% ) = $ 12
Contribution per unit = selling price per unit - variable cost per unit
Contribution per unit = $ 12 - $ 6.40
Contribution per unit = $ 5.60 per unit
Contribution margin = (Selling price per unit - variable cost per unit )/ Selling price per unit
Contribution margin = ($ 12 - $ 6.40 ) / $ 12  
Contribution margin = 46.67 ( rounded to 2 decimals)
b) Calculate the Break even point in units and in dollars :
Break even point ( in units ) = Fixed cost / contribution margin per unit
Break even point ( in units ) =   $ 150,000 / $ 5.60 per unit
Break even point ( in units ) =   26,785.71 units ( rounded to 2 decimal )
Break even point ( in dollars ) = Break even point ( in units ) * selling price per unit
Break even point ( in dollars ) = 26,785.71 units * $ 12 per unit  
Break even point ( in dollars ) = $ 321,428.52 ( rounded to 2 decimal )
c) share of market would the film have to achieve to earn 20 % return on focus 's investment the first year :
Focus's Return on investment = 20 %
Return on investment = $ 150,000 * 20 % = $ 30,000
Retailer margin is 40 percent
Margin = (100,000 units * $ 20 per unit * 40 % ) = $ 800,000
Return on investment = margin * Turnover
so, Turnover = Return on investment / Margin
      Turnover = $ 30,000 / $ 800,000
      Turnover = $ 0.0375 per unit
Turnover for 100,000 units = ($ 0.0375 per unit * 100,000 units) = 3,750 units
Share of marketing in the first year = (3,750 units / 100,000 units)* 100 = 3.75 %
So, share of marketing in the first year = 3.75 %
.

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