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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

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?

To determine

Concept introduction:

Break-even point:

The break-even point is the level of production at which the contribution earned recovers the fixed cost of the company i.e. no profit and no loss.

The best strategy for the AG Inc. for the new video games.

Explanation

The first strategy is to do nothing which gives results as:

    ParticularsAmount   ($)
    Sales Revenue   ($800,000×$75)  60,000,000
    Expenses:
    Variable costs   (800,000×$45)  (36,000,000)
    Contribution margin  24,000,000
    Production cost  (9,000,000)
    Fixed cost  (15,000,000)
    Income from operationsNil

The second strategy is to drop the selling price to $60 which will increase the sales volume to 2,000,000 which gives result as:

    ParticularsAmount   ($)
    Sales Revenue   ($2,000,000×$60)  120,000,000
    Expenses:
    Variable costs   (2,000,000×$45)  (90,000,000

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