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Management Accounting: Unit Contribution and Contribution Margin

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Video Concepts, Inc. (VCI) markets video equipment and film through a variety of retail outlets. Presently, VCI is faced with a decision as to whether it should obtain the distribution rights to an unreleased film titled Touch of Orange. If this film is distributed by VCI directly to large retailers, VCI's investment in the project would be $150,000. VCI estimates the total market for the film to be 100,000 units. Other data available are as follows:

Cost of distribution rights for film
$125,000

Label design
5,000

Package design
10,000

Advertising
35,000

Reproduction of copies (per 1,000)
4,000

Manufacture of labels and packaging (per 1,000)
500

Royalties (per 1,000)
500

VCI's suggested retail price for the film is $20 per unit. The retailer's margin is 40 percent.

A. What is VCI's unit contribution and contribution margin?

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Solution Preview

Contribution Margin = Sales - Variable Cost

The variable costs are
Reproduction of copies (per 1,000)
4,000
Per unit = 4,000/1,000 ...

Solution Summary

The solution explains how to calculate the unit contribution and contribution margin.

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