Concept explainers
Break-even analysis
Aquarius Games Inc. has finished a new video game. Triathlon Challenge. Management is
now considering its marketing strategies. The following information is available:
Two managers. Haley Chipana and Dan Gillespie, had the following discussion of ways to increase the profitability of this new offering:
Haley: I think we need to think of sonic way to increase our profitability. Do you have any ideas?
Dan: Well, I think the best Strategy would be to become aggressive on price.
Haley: How aggressive?
Dan: If we drop the price to $60 per unit and maintain our advertising budget at $15.000.000,1 think we will generate sales of 2,000.000 units.
Haley: I think that's the wrong way to go. You're giving too much up on price. Instead. I think we need to follow an aggressive advertising strategy.
Dan: How aggressive?
Haley: If we increase our advertising to a total of $20,000,000. we should be able to increase sales volume to 1,200.000 units without any change in price.
Dan: 1 don't think that's reasonable. We'll never cover the increased advertising costs.
Which strategy is best: Do nothing? Follow the advice of Dan Gillespie? Or follow Haley Chipana's strategy?
Trending nowThis is a popular solution!
Chapter 11 Solutions
Survey of Accounting (Accounting I)
- Video Tech is considering marketing one of two new video games for the coming holiday season: Battle Pacific or Space Pirates. Battle Pacific is a unique game and appears to have no competition. Estimated profits (in thousands of dollars) under high, medium, and low demand are as follows: Video Tech is optimistic about its Space Pirates game. However, the concern is that profitability will be affected by a competitor’s introduction of a video game viewed as similar to Space Pirates. Estimated profits (in thousands of dollars) with and without competition are as follows: Develop a decision tree for the Video Tech problem. For planning purposes, Video Tech believes there is a 0.6 probability that its competitor will produce a new game similar to Space Pirates. Given this probability of competition, the director of planning recommends marketing the Battle Pacific video game. Using expected value, what is your recommended decision? Show a risk profile for your recommended decision. Use sensitivity analysis to determine what the probability of competition for Space Pirates would have to be for you to change your recommended decision alternative.arrow_forwardSouthland Corporation’s decision to produce a new line of recreational products resulted in the need to construct either a small plant or a large plant. The best selection of plant size depends on how the marketplace reacts to the new product line. To conduct an analysis, marketing management has decided to view the possible long-run demand as low, medium, or high. The following payoff table shows the projected profit in millions of dollars: What is the decision to be made, and what is the chance event for Southland’s problem? Construct a decision tree. Recommend a decision based on the use of the optimistic, conservative, and minimax regret approaches.arrow_forwardPLEASE SOLVE IN EXCEL :B&B has a new baby powder ready to market. If the firm goes directly to the market with the product, there is only a 60 percent chance of success. However, the firm can conduct customer segment research, which will take a year and cost $1.21 million. By going through research, the company will be able to better target potential customers and will increase the probability of success to 75 percent. If successful, the baby powder will bring a present value profit (at time of initial selling) of $19.1 million. If unsuccessful, the present value payoff is only $6.1 million. The appropriate discount rate is 14 percent. Calculate the NPV for the firm if it goes to market immediately and if it conducts customer segment research. (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) Should the firm conduct customer segment research or go to the market immediately? multiple…arrow_forward
- #15 Carni’s boss stated that after reviewing first quarter earnings, the company decided to invest in only one store in the city. After evaluating the performance of the store, the company will determine if it wants to increase its presence in the area. a) If you were Carni, what method of evaluation would you use to recommend a site for a new video store? b) Explain how you would determine which site to invest in.arrow_forward1. Chemitronix Ltd. is a microchips manufacturing company . It was found that the business is at the maturity stage , demanding some change . After rigorous research , management came up with the following decision variables Expansion : 45 % chance of gaining 1,500,000 ; 55 % chance of losing X New Product : 50 % chance of gaining 900,000 ; 50 % chance of losing 600374 What must have been the value of expansion loss if expansion and new product will result to the same expected monetary values ? Add your answer________________ 2. An engineering project has an investment amount of $ 129548 with an annual net profit of $ 53077 for 4 years. If the interest rate and average inflation rate are 15 % and 6 % , respectively , calculate the present worth of the entire period . Add your answer________________arrow_forward1) Brandon Production is a small firm focused on the assembly and sale of custom computers. The firm is facing stiff competition from low-priced alternatives, and is looking at various solutions to remain competitive and profitable. Current financials for the firm are shown in the table below. In the first option, marketing will increase sales (and costs) by 50%. The next option is Vendor (Supplier) changes, which would result in a decrease of 12% in the cost of inputs. Finally, there is an OM option, which would reduce production costs by 25%. Which of the options would you recommend to the firm if it can only pursue one option? In addition, comment on the feasibility of each option. Business Function Current Value Cost of Inputs $50,000 Production Costs $30,000 Revenue $83,000arrow_forward
- To increase Sales and Sales Growth, the top Marketing Manager suggested to price products slightly lower than the main competitor and at the same time increase product quality (competitor is not expected to react or make changes). This strategy would require an initial one time investment today of $1 million in advertising (and for some machines) and the Net Profit Margin (and Cash Flows) will be zero for years 1, 2, 3. However, sales are expected to grow 20% in years 1,2,3 (then sales will stabilize and sales growth will be 1% in year 4 and over). Also, in year 4 Net Profit Margin will return to 5% (due to economies of scale). (Some numbers have been pre-filled in the tables below). CURRENT BUSINESS SITUATION END OF YEAR 0 1 … Sales Growth 0% … Net Profit Margin 5% … Sales ($Millions) 80.00 … Profit or Cash Flow 4.00 … NPV(i=.15) 26.67 $Millions SUGGESTED SALES…arrow_forwardVideo Tech Ltd manufactures video game machines. Market saturation and technological innovations have caused pricing pressures that have resulted in declining profits. To stem the slide in profits until new products can be introduced, top management has started to focus on achieving cost savings in manufacturing and increases in sales volume. Sales can be increased only if production volume increases. Therefore, an incentive program has been developed to reward those production managers who contribute to an increase in the number of units produced and achieve cost reductions. In addition, a just-in-time purchasing program has been implemented, and raw materials are purchased on an as-needed basis.The production managers have responded to the pressure to improve manufacturing performance and this has resulted in an increase in the number of completed units over normal production levels. The video game machines are put together by the assembly group, which requires parts from both the…arrow_forwardChemitronix Ltd. is a microchips manufacturing company. It was found that the business is at the maturity stage, demanding some change. After rigorous research, management came up with the following decision variables Expansion: 45% chance of gaining 1,500,000; 55% chance of losing X New Product: 50% chance of gaining 900,000; 50% chance of losing 572279 What must have been the value of expansion loss if expansion and new product will result to the same expected monetary values?arrow_forward
- The Gizmo Manufacturing Company is considering making and selling a new product. The following data have been provided to management: Some managers are reluctant to launch a new product because of the uncertainty of future sales. To provide management with information that might make it easier to draw the correct conclusion, a break-even analysis will be performed for annual sales required to economically justify introducing the new product.What is the break-even value of units sold annually?arrow_forwardQuestion 2 : ABC CO. is considering replacing a production line with a new, more productive one. You are given the information that follows. The existing production line currently generates $100,000 profit per year and could be sold today for $40,000. The new proposed production line would generate profits of $150,000 per year The new proposed production line requires an initial investment $80,000. The company is seeking your advice regarding whether to replace the production line or keep the existing one. Required: Based on the Marginal analysis concept, what would you recommend? State the reasons why focusing on profit only should not be the optimal goal for companies.arrow_forwardTesla’s decision to produce a new line of compact and full sized cars resulted in the need to construct either a small plant or a large plant. The best selection of plant size depends on how the marketplace reacts to the new product line. To conduct an analysis, marketing management has decided to view the possible long-run demand as low, medium, or high. The following payoff table shows the projected profit in millions of dollars: Long Run Demand Plant size Low Medium High Small 80 200 350 Large 120 180 190 Construct an influence diagram. Construct a decision tree. Recommend a decision based on the use of the optimistic, conservative, and minimax regret approaches.arrow_forward
- Financial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubEssentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning