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 sales 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 |
*The cost of the video game, packaging, and copying costs. |
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?
Thomas: If 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 too much up 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: I 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? Or follow James Hamilton’s strategy?

Trending nowThis is a popular solution!

Chapter 19 Solutions
FINANCIAL+MANG.-W/ACCESS PRACTICE SET
- XYZ is an all-equity firm that has 52,500 shares of stock outstanding at a market price of $18.45 per share. The firm is considering a capital structure with 40% debt at a rate of 5.5% and plans to use the proceeds to repurchase shares. Determine the number of shares outstanding once the debt is issued.arrow_forwardplease give me true answerarrow_forwardGeneral accounting questionarrow_forward
- Excel Applications for Accounting PrinciplesAccountingISBN:9781111581565Author:Gaylord N. SmithPublisher:Cengage LearningEssentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage LearningPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning



