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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?

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 21, Problem 21.4CP
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?

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Chapter 21 Solutions

Accounting
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