Question

Kirkland Video Games Inc. is developing a new video game. It is the most sophisticated game...

Kirkland Video Games Inc. is developing a new video game. It is the most sophisticated game on the market. It sells the video game for $250 per copy. Variable costs to produce and sell the video game amount to $50 per copy. Fixed costs amount to $450,000. The company anticipates selling 300 copies of the game per month. The company's policy is to stop producing the video game as soon as a competitor comes out with a more sophisticated version.

Calculate break-even point and sales required to earn target operating income in dollars.

Instructions

  • a. Calculate the amount of operating income the company will earn if it takes 10 months for a competitor to produce a more sophisticated version of the video game.
  • b. Calculate how many units of the video game the company will have to sell in order to break even.
  • c. If the company wishes to earn $30,000 over the product's life, calculate the selling price of the video game if a competitor introduces a more sophisticated version of the video game in six months. Assume that unit sales are 300 copies per month.
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Homework Answers

Answer #1

Answer-a:

Answer-b:

Breakeven point (in units) = Fixed cost / Contribution per unit

= $450,000 / ($250 - 50) = 2,250 units

Answer-c:

Total number of units sold in 6 months: 300 units x 6 months = 1,800 units

Sales = Variable expenses + Fixed expenses + Target profit

Selling price x 1,800 units = $50 per unit x 1,800 units + $450,000 + $ 30,000 = $570,000

Selling price = $316.67 per unit

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