M. Anthony, LLP, produces music in a studio in London. The cost of producing one
ID: 2481036 • Letter: M
Question
M. Anthony, LLP, produces music in a studio in London. The cost of producing one typical song follows: The fixed costs allocated to each song are based on the assumption that the studio produces 60 songs per month. Required Treat each question independently. Unless stated otherwise, M. Anthony charges $80,000 per song produced. a. How many songs must the firm produce per month to break even? b. Market research estimates that a price increase to $90,000 per song would decrease monthly volume to 52 songs. The accounting department estimates that fixed costs would remain unchanged in total, and variable costs per song would remain unchanged if the volume were to drop to 52 songs per month. How would a price increase affect profits? c. Assume that M. Anthony's studio is operating at its normal volume of 50 songs per month. It has received a special request from a university to produce 30 songs that will make up a two-CD set. M. Anthony must produce the music next month or the university will take its business elsewhere. M. Anthony would have to give up normal production of 10 songs because it has the capacity to produce only 80 songs per month. Because of the need to produce songs on a timely basis. M. Anthony could not make up the production of those songs in another month. Because the university would provide its own musicians, the total variable cost (labor plus overhead) would be cut to $15,000 per song on the special order for the university. The university wants a discounted price; it is prepared to pay only $40,000 per song and believes a fee reduction is in order. Total fixed costs will be the same whether or not M. Anthony accepts the special order. Should M. Anthony accept the special order? d. Refer to the situation presented in (c) above. Instead of offering to pay $40,000 per song, suppose the university comes to M. Anthony with the following proposition. The university official says. "We want you to produce these 30 songs for us. We do not want you to be worse off financially because you have produced these songs. On the other hand, we want the lowest price we can get." What is the lowest price that M. Anthony could charge and be no worse off for taking this order?Explanation / Answer
a) BEP unit =Fixed Cost / Contribution per unit
=$46,000 / $60,000
=76
Sales =$80,000
Varibale Cost=Labor+variable overhead
=$17,000+$3,000
=$20,000 per song
contribution = Sales- Variable cost
=$80,000 - $20,000
=$60,000
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b) Old
Sales=$80,000
Less:
Variable Cost=$20,000
______________________
Contribution=$60,000
Less:
Fixed Cost=$46,000
_________________________
Profit =$14,000
New profit
Sales =$90,000
Less:
Variable Cost=$20,000
______________________
Contribution=$70,000
Less:
Fixed Cost=$46,000
_________________________
Profit =$24,000
__________________________
Profit affect =$24,000 / $14,000=1.71 per year
24,000 - 14,000
=$10,000 has increased
_____________________________________________________________________________________
c)No, Mr. Anthony should not accept the special order because university pay $40,000 per song, because variable cost per song 20,000 but university provide 15,000=$5,000(loss) fixed cost =$46,000 but university provide $6,000(loss).
Total loss per song =$5,000 + $6,000=$11,000
___________________________________________________________________________
d)As per Anthony =$ 66,000 making cost +5000(seeking as profit)
=$71,000
Anthony can seek $71,000 per song to the University.
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