Scottish Company manufactures a variety of toys and games. John Chisholm, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2018 when 30,000 were projected. Sales for 2019 look no better. At $100 per game, it is not a hot seller. Direct costs of the board game are $56 variable cost and $100,000 fixed. John is considering several options. Option One: Cut the price to $70 and perhaps sell 15,000 units. Option Two: Cut the price to $60, reduce material costs by $10, and cut advertising by $60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to $80 and include a $10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 percent of the rebate coupons would be redeemed.
What is the profit (loss) from Option Two?

Question

Quizplus · Accepted Answer

For Option Two, the price is cut to $60, and material costs are reduced by $10 (from $56 to $46). The fixed costs are reduced by $60,000 (from $100,000 to $40,000 due to the cut in advertising). With an anticipated volume of 10,000 units, the calculation is as follows:Revenue = 10,000 units * $60/unit = $600,000Variable Costs = 10,000 units * $46/unit = $460,000Fixed Costs = $40,000Profit = Revenue - Variable Costs - Fixed CostsProfit = $600,000 - $460,000 - $40,000 = $100,000

Scottish Company Manufactures a Variety of Toys and Games