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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Break-even analysis

Somerset Inc. has finished a new video game, Snowboard Challenge. Management is now considering its marketing strategies. The following information is available:

Anticipated vales price per unit................ $80
Variable cost per unit*......................... $35
Anticipated volume........................... 1,000,000 units
Production costs.............................. $20,000,000
Anticipated advertising........................ $15,000,000

Two managers, James Hamilton and Thomas Seymour, had the following discussion of ways to increase the profitability of this new offering:

James: I think we need to think of some way to increase our profitability. Do you have any ideas?

Thomas: Well. I think the best strategy would be to become aggressive on price.

James: How aggressive?

James: lf we drop the price to $60 per unit and maintain our advertising budget at $15,000,000. I think we will generate total sales of 2,000,000 units.

James: I think that's the wrong way to go. You're giving up too much on price. Instead, I think we need to follow an aggressive advertising strategy.

Thomas: How aggressive?

James: If we increase our advertising to a total of $25,000,000, we should be able to increase sales volume to 1,400,000 units without any change in price.

Thomas: l don’t think that's reasonable. We'll never cover the increased advertising costs.

Which strategy is best: Do nothing, follow the advice of Thomas Seymour, orb follow James Hamilton's strategy?

To determine

Break-even Analysis: It is a method followed to analyze the relationship between the sales, costs, and the related profit or loss at various levels of units sold. In other words, it shows the effect of the changes in the cost and the sales volume on the operating income of the company.

To determine: the best strategy.

Explanation

Determine the profit of D’s Strategy.

Particulars Details Amount ($)
Number of units 1,000,000
Selling price per unit ×$80 80,000,000
Less: Variable cost
Number of units 1,000,000
Variable cost per unit ×$35 (35,000,000)
Less: Fixed cost
Production cost $20,000,000
Anticipated advertising $15,000,000 (35,000,000)
Profit 10,000,000

Table (1)

Determine the profit of T’s Strategy.

Particulars Details Amount ($)
Number of units 2,000,000
Selling price per unit ×$60 120,000,000
Less: Variable cost
Numbe...

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