Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in the current year when 30,000 were projected. Sales for the following year 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. Option Four: Cut the price to $60 per game and possibly sell 20,000 units.
-Refer to the figure.What is the profit or loss from Option Two?

Question

Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in the current year when 30,000 were projected. Sales for the following year 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. Option Four:  Cut the price to $60 per game and possibly sell 20,000 units.
-Refer to the figure.What is the profit or loss from Option Two?

Quizplus · Accepted Answer

Option Two involves cutting the price to $60 and reducing material costs by $10, thus making the variable cost $46 ($56 - $10). With the sale of 10,000 units, the total revenue would be $600,000 ($60 x 10,000). The total variable costs would be $460,000 ($46 x 10,000). Fixed costs are reduced by $60,000 from $100,000 to $40,000. Therefore, the profit is calculated as total revenue minus total variable costs and fixed costs: $600,000 - $460,000 - $40,000 = $100,000.

Anderson Company Manufactures a Variety of Toys and Games