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 2016 when 30,000 were projected. Sales for 2017 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 first calculate the new variable cost per game after reducing material costs by $10.

New variable cost = $56 - $10 = $46

Next, we can calculate the new contribution margin per game by subtracting the new variable cost from the new selling price of $60.

Contribution margin per game = $60 - $46 = $14

Finally, we can calculate the total contribution margin for 10,000 units.

Total contribution margin = 10,000 units x $14 = $140,000

We also need to take into account the reduction in advertising cost by $60,000, which reduces the fixed costs to $40,000.

Total costs = $40,000 (fixed) + 10,000 units x $46 (variable) = $460,000

Profit (loss) = Total contribution margin - Total costs

Profit (loss) = $140,000 - $460,000 = ($320,000)

Therefore, Option Two would result in a loss of ($320,000).

The best choice would be Option One because it has the potential to sell the most units at a slightly reduced price, resulting in higher total revenue and potentially a higher contribution margin.

Scottish Company Manufactures a Variety of Toys and Games