Music Industry Financials

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Marginal costing is a traditional financial technique which is used by companies for short term decision making within the music & entertainment industry. The concept of marginal costing is concerned with the treatment of fixed costs and the relationship that exists between sales, variable costs and contribution. This technique is often used by record labels to estimate the costs which they will incur & profits they will earn per unit which is manufactured and sold.
Cost behaviour – we need to understand how costs behave at different levels of activity so that we can determine what costs should have been for a trading period and estimate costs for a future period. Cost behaviour studies the way that costs fluctuate. Two
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of units

Margin of safety is the amount which a price of a product can drop before you stop making a profit. It is also explained as the excess of actual sales over breakeven sales (expressed either as a no. of units or as a percentage). This calculation is considered important in times of recession or where the market is falling for other reasons. See the example below for explanation of how the margin of safety is calculated.

Units sold = 500
Breakeven level of sales (units) = 357
Margin of Safety = 500 – 357 = 143 units
143 units ÷ 500 = 0.286 x 100 = 28.6%
Sales could fall by 28.6% before losses incurred

Although these calculations are used on a daily basis by companies within the music industry, we must remember that these are all estimated figures. Music trends vary all the time, which makes the music & entertainment industry very unpredictable, as well as a volatile market to work within. In conclusion there is a lot of risk involved when investing in a product or service because the amount of sales is always a predicted figure.

TASK 2 1. Royalty revenue under the traditional deal for a single CD unit is £0.76p. 2. Royalty revenue under the traditional deal for a single digital download is £0.06p. 3. 31,579 CDs and 266,667 digital downloads. 4. Contribution per unit (CDs) is £4.55p and (Digital downloads) is £0.47p. 5. The recoupment point is when 39,560 CDs and 255,319
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