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 Three?

Question

Quizplus · Accepted Answer

To calculate the profit (loss) from Option Three, we need to first calculate the total revenue, total variable costs, and the total fixed costs associated with this option.

Total revenue = (15,000 units x $80 per unit) - (15,000 units x $10 rebate x 0.3 redemption rate)
Total revenue = $1,080,000 - $45,000
Total revenue = $1,035,000

Total variable costs = 15,000 units x $56 per unit
Total variable costs = $840,000

Total fixed costs = $100,000

Total costs = Total variable costs + Total fixed costs
Total costs = $840,000 + $100,000
Total costs = $940,000

Profit (loss) = Total revenue - Total costs
Profit (loss) = $1,035,000 - $940,000
Profit (loss) = $95,000

Therefore, Option Three would result in a profit of $95,000. The best choice depends on the goals and priorities of the company. Option Three may be the best choice if the company wants to maintain the price point and offer a rebate to incentivize purchases. However, if the company wants to increase sales volume, then Option One or Option Two may be better alternatives. The company could also consider additional marketing and advertising efforts to increase sales of the board game.

Scottish Company Manufactures a Variety of Toys and Games