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Entertainment Business Finance - Online Assignment #2 Break-even analysis is useful as a first step in developing financial applications, which can be used in budgeting and pricing decisions. The main purpose of this analysis is to have some idea of how much we need to sell before a profit will be made. Break-even analysis is extremely important before starting a new business (or launching a new product) because it gives answers to crucial questions such as \"How sensitive is the profit of the business to decreases in sales or costs?\" This analysis can be also extended to early stage businesses in order to determine how accurate the first predictions were and monitor whether the company is on the right path (the path that leads to profits) or not. Even mature companies must take into consideration their current break even point and find ways to lower that benchmark in order to increase profits. The recording industry has changed drastically in the past decade. The Internet has opened up various new distribution channels and business models that have challenged the very existence of the traditional major record label. In the past, major record labels with inhouse manufacturing and distribution capabilities were able to dominate the marketplace through economies of scale. For independent labels with lower sales volume, it was especially difficult to enter the marketplace for two reasons: If they were to outsource manufacturing, the cost of producing and distributing each CD on top of the royalties and other variable expenses would be prohibitively high. Indie labels could instead choose to bring manufacturing in-house by investing in expensive duplicators and label printing equipment. By investing in this equipment, labels were able to reduce their variable costs per CD sold and increase their contribution margins. The problem was that independent labels simply lacked the sales volume (economies of scale) required to cover the large fixed costs of the equipment and labor associated with bringing manufacturing in house. The Internet has changed the industry significantly. Traditional record labels kept all their eggs in one basket and did not consider alternative ways of monetizing recorded music sales as digital downloads became more prevalent around the turn of the new century. Today, traditional record label execs still have yet to figure out how to monetize digital sales. Independent record labels have benefitted from the lower barriers to entry and greater flexibility than larger record labels, but still face challenges because of their limited resources. Being a small company, owners of independent record labels are constantly faced with decisions about selling prices and cost control. Unless they can make reasonably accurate predictions about the price and cost charges, their decisions may yield unprofitable outcomes For this assignment, we will take a closer look at the hit-driven business of the recording industry and examine the viability of physical CD album sales vs. a digital album sold on iTunes by conducting a break even analysis for an independent record label, Discfunktional Records. We will use the data gathered from the break-even analysis to help the company make pricing, manufacturing and marketing decisions. Entertainment Business Finance - Online Wholesale Price Recording Mechanical Royalties Artist Royalties Producer Royalties Postage Distribution Fee (For distributors or iTunes) Positioning Fee Manufacturing Returns postage Refurbishing Annual Marketing Monthly Rent Monthly Salaries Annual Insurance Monthly Professional Services/Consultants Monthly Office Supplies Monthly Utilities Monthly Phone and Internet 1. 2. 3. 4. 5. 6. 7. 8. 9. CD Album $10.00 iTunes Album $12.00 $0.33 $1.02 $1.14 $0.29 $0.10 $0.33 $1.02 $1.00 $0.29 $0 $1.80 $1.00 $2.77 $0.03 $0.05 $4.16 $1.00 $0 $0 $0 $40,000.00 $1,000.00 $4,050.00 $2,600.00 $3,000.00 $200.00 $200.00 $250.00 Identify the total Annual Fixed Costs for the record label. Identify the total Variable Costs Per Album for both a physical CD album and an iTunes album. What is the Contribution Margin Per Album for both a physical CD album and an iTunes album? If the label were to sell physical CD's only, how many albums need to be sold each year to break even? How many iTunes albums need to be sold instead of CD's to break even? How much sales revenue would be required each year from only physical CD sales to break even? How much sales revenue would be required each year to break even if selling only iTunes albums? How many physical CD's will need to be sold in order to earn a profit of $73,500? If the label were to sell only iTunes albums instead, how many albums need to be sold to earn the same profit objective? How would changes in selling price, variable costs, fixed costs, and sales volume affect profits? The label is considering investing in a CD duplicator to manufacture physical albums in-house instead of outsourcing to another manufacturer. Explain how the label might be better or worse off by investing in additional equipment to reduce the manufacturing costs per CD. How would this be affected by sales volume? For your own company you are planning for your business plan thesis, list and explain your company's fixed and variable expenses. ***Although it is not necessary to identify the dollar amounts, please briefly explain your rationale about how each expense applies to your company and the specific use. These explanations should be no longer than one sentence per expense. Do not provide a list of generic expenses without any explanations. 10. As your company's sales volume increases, what decisions can be made to leverage higher sales volume to increase profitability and efficiency? ***Please see rubric for more specific grading criteria. Entertainment Business Finance - Online