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Lore Inc has finished a new virtual reality game, Sailor's Revenge. Management is now considering its marketing strategies. The table below is available to help with the decision. Two managers, Shohreh Johnson and Anton Ramirez, had the following discussion regarding ways to increase the profitability of the new offering: Antonio: I think we need to think of some way to increase our profitability. Do you have any ideas? Shohreh: Well, I think the best strategy would be to become aggressive on price. Antonio: How aggressive? Shohreh: If we decrease the price by 10% per unit and maintain our advertising budget, I think we will increase sales volume to 140% of our current sales. Antonio: I think that is the wrong way to go. You are giving up too much on price. Instead, I think we need to follow an aggressive advertising strategy. Shohreh: How aggressive? Antonio: If we increase our advertising by 15%, we should be able to increase sales volume to 130% of our current sales without any change in price. Shohreh: I don't think that is reasonable. We will never cover the increased advertising costs. Part 1: Calculate (1) unit contribution margin, (2) contribution margin, (3) contribution margin ratio, and (4) operating income for all three options. "Hint: Set up Contribution Margin Income Statement to calculate operating income. Part 2: Which strategy is best and why? Remember to consider operating income, contribution margin ratio, etc. in your analysis Anticipated sales price per unit Variable cost per unit Anticipated volume (in units) Production costs Anticipated advertising Unit Contribution Margin Contribution Margin Contribution Margin Ratio Operating Income Salon Current $80.00 $45.00 1.000.000 units $20,000,000.00 $10,000,000.00 Shohreh ? ? ? ? ? Antonio ? ? ? ? ?

Lore Inc has finished a new virtual reality game, Sailor's Revenge. Management is now considering its marketing strategies. The table below is available to help with the decision. Two managers, Shohreh Johnson and Anton Ramirez, had the following discussion regarding ways to increase the profitability of the new offering: Antonio: I think we need to think of some way to increase our profitability. Do you have any ideas? Shohreh: Well, I think the best strategy would be to become aggressive on price. Antonio: How aggressive? Shohreh: If we decrease the price by 10% per unit and maintain our advertising budget, I think we will increase sales volume to 140% of our current sales. Antonio: I think that is the wrong way to go. You are giving up too much on price. Instead, I think we need to follow an aggressive advertising strategy. Shohreh: How aggressive? Antonio: If we increase our advertising by 15%, we should be able to increase sales volume to 130% of our current sales without any change in price. Shohreh: I don't think that is reasonable. We will never cover the increased advertising costs. Part 1: Calculate (1) unit contribution margin, (2) contribution margin, (3) contribution margin ratio, and (4) operating income for all three options. "Hint: Set up Contribution Margin Income Statement to calculate operating income. Part 2: Which strategy is best and why? Remember to consider operating income, contribution margin ratio, etc. in your analysis Anticipated sales price per unit Variable cost per unit Anticipated volume (in units) Production costs Anticipated advertising Unit Contribution Margin Contribution Margin Contribution Margin Ratio Operating Income Salon Current $80.00 $45.00 1.000.000 units $20,000,000.00 $10,000,000.00 Shohreh ? ? ? ? ? Antonio ? ? ? ? ?

Managerial Accounting
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter11: Differential Analysis And Product Pricing
Section: Chapter Questions
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Lore Inc has finished a new virtual reality game, Sailor's Revenge. Management is now considering its marketing strategies. The table below is available to help with the decision. Two managers, Shohreh Johnson and Antonio Ramirez, had the following discussion regarding ways to increase the profitability of the new offering: Antonio: I think we need to think of some way to increase our profitability. Do you have any ideas? Shohreh: Well, I think the best strategy would be to become aggressive on price. Antonio: How aggressive? Shohreh: If we decrease the price by 10% per unit and maintain our advertising budget, I think we will increase sales volume to 140% of our current sales. Antonio: I think that is the wrong way to go. You are giving up too much on price. Instead, I think we need to follow an aggressive advertising strategy. Shohreh: How aggressive? Antonio: If we increase our advertising by 15%, we should be able to increase sales volume to 130% of our current sales without any change in price. Shohreh: I don't think that is reasonable. We will never cover the increased advertising costs. Part 1: Calculate (1) unit contribution margin, (2) contribution margin, (3) contribution margin ratio, and (4) operating income for all three options. "Hint: Set up Contribution Margin Income Statement to calculate operating income. Part 2: Which strategy is best and why? Remember to consider operating income, contribution margin ratio, etc. in your analysis Anticipated sales price per unit Variable cost per unit Anticipated volume (in units) Production costs Anticipated advertising Unit Contribution Margin Contribution Margin Contribution Margin Ratio Operating Income Sales Current $80.00 $45.00 1,000,000 units $20,000,000.00 $10,000,000.00 Shohreh ? ? ? ? ? ? ? ? Antonio ? ? ? ?
Transcribed Image Text:Lore Inc has finished a new virtual reality game, Sailor's Revenge. Management is now considering its marketing strategies. The table below is available to help with the decision. Two managers, Shohreh Johnson and Antonio Ramirez, had the following discussion regarding ways to increase the profitability of the new offering: Antonio: I think we need to think of some way to increase our profitability. Do you have any ideas? Shohreh: Well, I think the best strategy would be to become aggressive on price. Antonio: How aggressive? Shohreh: If we decrease the price by 10% per unit and maintain our advertising budget, I think we will increase sales volume to 140% of our current sales. Antonio: I think that is the wrong way to go. You are giving up too much on price. Instead, I think we need to follow an aggressive advertising strategy. Shohreh: How aggressive? Antonio: If we increase our advertising by 15%, we should be able to increase sales volume to 130% of our current sales without any change in price. Shohreh: I don't think that is reasonable. We will never cover the increased advertising costs. Part 1: Calculate (1) unit contribution margin, (2) contribution margin, (3) contribution margin ratio, and (4) operating income for all three options. "Hint: Set up Contribution Margin Income Statement to calculate operating income. Part 2: Which strategy is best and why? Remember to consider operating income, contribution margin ratio, etc. in your analysis Anticipated sales price per unit Variable cost per unit Anticipated volume (in units) Production costs Anticipated advertising Unit Contribution Margin Contribution Margin Contribution Margin Ratio Operating Income Sales Current $80.00 $45.00 1,000,000 units $20,000,000.00 $10,000,000.00 Shohreh ? ? ? ? ? ? ? ? Antonio ? ? ? ?
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