Accounting 25th Edition by Carl Warren, James Reeve, Jonathan Duchac

Exercise 3

Break-even analysis
Somerset Inc. has finished a new video game, Snowboard Challenge. Management is now considering its marketing strategies. The following information is available:

*The cost of the video game, packaging, and copying costs.
Two managers, James Hamilton and Thomas Seymour, had the following discussion of ways to increase the profitability of this new offering:
James: I think we need to think of some way to increase our profitability. Do you have any ideas
Thomas: Well, I think the best strategy would be to become aggressive on price.
James: How aggressive
Thomas: If we drop the price to $60 per unit and maintain our advertising budget at $15,000,000, I think we will generate total sales of 2,000,000 units.
James: I think that's the wrong way to go. You're giving too much up on price. Instead, I think we need to follow an aggressive advertising strategy.
Thomas: How aggressive
James: If we increase our advertising to a total of $25,000,000, we should be able to increase sales volume to 1,400,000 units without any change in price.
Thomas: I don't think that's reasonable. We'll never cover the increased advertising costs.
Which strategy is best: Do nothing Follow the advice of Thomas Seymour Or follow James Hamilton's strategy