Assume That Microsoft and Sony Both Plan to Introduce a New

Essay

Assume that Microsoft and Sony both plan to introduce a new hand-held video game. Microsoft plans to use a heavily automated production process to produce its product while Sony plans to use a labor-intensive production process. The following revenue and cost relationships are provided:
$\begin{array}{|l|c|c|}\hline &\text { Microsoft Game } & \text { Sony Game }\\\hline \text { Selling price per unit } & 150 & 150 \\\hline \text { Variable costs per unit } & & \\\hline \text { Direct materials } & \$27.00 &\$ 27.00 \\\hline \text { Direct labor } & 7.50 & 30.0 \\\hline \text { Overhead } & 7.50 & 30.00 \\\hline \text { Selling and administrative } & 3.00 & 3.00 \\\hline \text { Annual fixed costs } & & \\\hline \text { Overhead } & \$ 600,000 & \$240,000 \\\hline \text { Selling and administrative } & 135,000 &135,000 \\\hline \end{array}$ Required:
(a) Compute the contribution margin per unit for each company.(b) Prepare a contribution income statement for each company assuming each company sells 8,000 units.(c) Compute each firm's net income if the number of units sold increases by 10%.(d) Which firm will have more stable profits when sales change? Why?