Assume that Microsoft and Sony both plan to introduce a new hand-held video game.Microsoft plans to use a heavily automated production process to produce its product while Sony plans to use a labor-intensive production process.The following revenue and cost relationships are provided:
$\begin{array}{lccc}
&\text { Microsoft Game}&\text { Sony Game }\
\text {Selling price per unit}&150&150\
\text { Variable cost per unit }\
\text { Direct material } & \$ 27.00 & \$27.00 \
\text { Direct labor } & 7.50&30.00 \
\text { Overhead } & 7.50&30.00 \
\text { Selling and administrative } & 3.00 & 3.00\
\text { Annual fixed costs } & \
\text { Overhead } & \$ 600,000& \$ 240,000 \
\text { Selling and administrative } & 135,000& 135,000
\end{array}$ Required:
(a)Compute the contribution margin per unit for each company.
(b)Prepare a contribution income statement for each company assuming each company sells 8,000 units.
(c)Compute each firm's net income if the number of units sold increases by 10%.
(d)Which firm will have more stable profits when sales change? Why?

Question

Assume that Microsoft and Sony both plan to introduce a new hand-held video game.Microsoft plans to use a heavily automated production process to produce its product while Sony plans to use a labor-intensive production process.The following revenue and cost relationships are provided:
 $\begin{array}{lccc}
&\text { Microsoft Game}&\text { Sony Game }\
\text {Selling price per unit}&150&150\
\text { Variable cost per unit }\
\text { Direct material } & \$ 27.00 & \$27.00 \
 \text { Direct labor } &  7.50&30.00 \
 \text { Overhead } &  7.50&30.00 \
 \text { Selling and administrative } &  3.00 & 3.00\
\text { Annual fixed costs } & \
\text { Overhead } & \$ 600,000& \$ 240,000  \
\text { Selling and administrative } & 135,000& 135,000
\end{array}$ Required:
(a)Compute the contribution margin per unit for each company.
(b)Prepare a contribution income statement for each company assuming each company sells 8,000 units.
(c)Compute each firm's net income if the number of units sold increases by 10%.
(d)Which firm will have more stable profits when sales change? Why?

Quizplus · Accepted Answer

The Answer of Assume that Microsoft and Sony both plan to introduce a new hand-held video game.Microsoft plans to use a heavily automated production process to produce its product while Sony plans to use a labor-intensive production process.The following revenue and cost relationships are provided:
 $\begin{array}{lccc}
&\text { Microsoft Game}&\text { Sony Game }\
\text {Selling price per unit}&150&150\
\text { Variable cost per unit }\
\text { Direct material } & \$ 27.00 & \$27.00 \
 \text { Direct labor } &  7.50&30.00 \
 \text { Overhead } &  7.50&30.00 \
 \text { Selling and administrative } &  3.00 & 3.00\
\text { Annual fixed costs } & \
\text { Overhead } & \$ 600,000& \$ 240,000  \
\text { Selling and administrative } & 135,000& 135,000
\end{array}$ Required:
(a)Compute the contribution margin per unit for each company.
(b)Prepare a contribution income statement for each company assuming each company sells 8,000 units.
(c)Compute each firm's net income if the number of units sold increases by 10%.
(d)Which firm will have more stable profits when sales change? Why?

Assume That Microsoft and Sony Both Plan to Introduce a New