Case 11-3 | Accounting homework help

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:

The information given is Anticipated sales price per unit: $75 Variable cost per unit: $45 Anticipated sales volume in units: 800,000 Production costs: $9,000,000 Anticipated advertising costs: $15,000,000 Variable cost per unit is defined as the video game, packaging, and copying costs.

Two managers, Haley Chipana and Dan Gillespie, had the following discussion of ways to increase the profitability of this new offering:

Haley:I think we need to think of some way to increase our profitability. Do you have any ideas?

Dan:Well, I think the best strategy would be to become aggressive on price.

Haley:How aggressive?

Dan:If we drop the price to $60 per unit and maintain our advertising budget at $15,000,000, I think we will generate sales of 2,000,000 units.

Haley: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.

Dan:How aggressive?

Haley:If we increase our advertising to a total of $20,000,000, we should be able to increase sales volume to 1,200,000 units without any change in price.

Dan: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 Dan Gillespie? Or follow Haley Chipana’s strategy?

Read Case 11-3. Choose the best strategy and justify your decision based on appropriate accounting principles.

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