Question 2 Allied Games is developing a new game app. Allied expects to sell the game for $4.50 per download. The Part 2: CVP Analysis cost accountant has provided the following estimates for development, marketing, commissions, and royalty costs. Estimated Cost $ 68,000 Code programming Testing (reviews, field testing, reprogramming) 55,000 Depreciation on technical equipment 11,000 Administrative 13,000 Marketing Sales Team Commissions (3% of selling price) Distribution Commissions (25% of selling price) Game Designer Royalties (12% of selling price) Total Costs at Production of 300,000 Copies 50,000 40,500 337,500 162,000 $737,000 The only variable costs are sales team commissions, distribution commissions, and the game designer royalties. How many downloads must Allied Games sell in order to generate operating earnings of 25% of sales revenue? (Round up your answer to the nearest whole download.)
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
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