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 2014 when 30,000 were projected. Sales for 2015 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

To calculate the profit (loss) for Option Two, we need to determine the total revenue and total costs.

Total Revenue = 10,000 units x $60 per unit = $600,000

Total Variable Costs = 10,000 units x $46 per unit ($56 direct cost - $10 material cost reduction) = $460,000

Total Fixed Costs = $100,000 - $60,000 (advertising reduction) = $40,000

Total Costs = Total Variable Costs + Total Fixed Costs = $460,000 + $40,000 = $500,000

Profit (Loss) = Total Revenue - Total Costs = $600,000 - $500,000 = $100,000

Therefore, the profit from Option Two is $100,000.

The best choice for the company would be Option One. By cutting the price to $70, the company can sell more units and still make a profit. Option Three may also be a feasible choice, as the mail-in rebate offer may attract more customers and still generate a profit. However, Option Two results in a smaller profit compared to Option One and may not be the best choice for the company.

Scottish Company Manufactures a Variety of Toys and Games