1. Compute the contribution margin ratio using the advice Jane gave? 2. Compute the contribution margin ratio using the advice Sara gave? 3. Which Strategy is best for Somerset to increase profitablity?
Somerset Inc has finished a new video game, Snowboard Challenge. Management is now considering it's marketing strategies.
The following information is available:
Anticipated Sales price per unit ………………………………….$80
Variable cost per until………………………………………………$35
Anticipated volume………………………………………………….1,000,0000
Production Costs…………………………………………………….$20,000,000
Anticipated advertising ……………………………………………..$15,000,000
Two managers have different ideas on ways to increase the profitability.
Jane suggests dropping the price to $60 per unit and maintain our advertising budget at $15,000,000. She thinks they will generate total sales of 2,000,000 units
Sara suggests increasing out advertising budget to $25,000,000 she thinks sales will increase to 1,400,000 without changing the price
Which Strategy is best: Do nothing? Following Jane? Follow Sara?
Hint: Revenue - Variable Cost - Fixed Cost
1. Compute the contribution margin ratio using the advice Jane gave?
2. Compute the contribution margin ratio using the advice Sara gave?
3. Which Strategy is best for Somerset to increase profitablity?
A cost accounting technique called cost-volume-profit (CVP) analysis examines the effects that different cost and volume levels have on operational profit. Companies can utilize CVP to determine how many units they must sell to attain a specific minimum profit margin or break even (pay all expenditures). CVP analysis makes a number of presumptions, among them the constancy of the sales price, fixed costs, and variable costs per unit. For price, cost, and other factors, a CVP analysis uses a number of equations, which it then shows on an economic graph.
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