Chapter 21, Problem 21.3CP

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?