Case 11-3 Break-even analysis Aquarius Games Inc. has finished a new video game,
ID: 2585549 • Letter: C
Question
Case 11-3 Break-even analysis Aquarius Games Inc. has finished a new video game, Triathlon Challenge. Management is now considering its marketing strategies. The following information is available: Anticipated sales price per unit Variable cost per unit* Anticipated sales volume in units Production costs Anticipated advertising costs $75 $45 800,000 $9,000,000 $15,000,000 The video game, packaging, and copying costs ers, Haley Chipana and Dan Gillespie, had the following discussion of ways Two manag to increase the profitability of this new offering:Explanation / Answer
Aquarius Games Inc
Break-even analysis
Anticipated sales price per unit $75
Variable cost per unit $45
Contribution margin per unit $30
Sales in units 800,000
Contribution margin $30 x 800,000 = $24,000,000
Fixed costs –
Production costs $9,000,000
Anticipated advertising costs $15,000,000
Total fixed costs $24,000,000
Net operating income 0
Break-even point in units –
Break-even point in units = fixed cost/contribution margin per unit
Fixed cost = $24,000,000
Contribution margin per unit = $30
Break-even point in units = $24,000,000/$30 = 800,000 units
Analysis of the two strategies –
Strategy of Haley Chipana:
Decrease sales price to $60 and maintain advertising budget of $15,000,000
Sales price per unit $60
Variable cost per unit $45
Contribution margin per unit $15
Anticipated sales in units 2,000,000
Contribution margin $15 x 2,000,000 = $30,000,000
Fixed costs –
Production costs $9,000,000
Advertising costs $15,000,000
Total fixed costs $24,000,000
Net operating income $6,000,000
Hence, when sales price is reduced to $60, the company’s operating income is $6,000,000
Analysis of Strategy of Dan Gillespie:
Increase advertising expense to $20,000,000 to maintain sales volume of 1,200,000 units
Since the proposal has no change in sales price per unit and variable cost per unit, the contribution margin per unit would remain the same at $30.
Contribution margin per unit $30
Anticipated sales volume 1,200,000
Contribution margin $36,000,000
Fixed costs –
Production cost $9,000,000
Advertising cost $20,000,000
Total fixed cost $29,000,000
Net operating income $7,000,000
The operating income of Dan Gillespie’s advice is higher ($7,000,000) compared to the operating income of the strategy proposed by Haley Chipana ($6,000,000).
Hence, the company should follow Dan Gilespie’s advice – increase advertising expense to $20,000,000 and achieve the sales volume of 1,200,000 units.
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