Question

Sarah is the marketing manager for Utter Mayhem, the hottest new game among teenage gamers. In...

Sarah is the marketing manager for Utter Mayhem, the hottest new game among teenage gamers. In order to get her bonus she has to sell a lot of games in the Christmas launch, as Utter Mayhem was a bit pricy to make. She has the following information.

FC = $1.200.000
Price = $55
Unit variable cost = $28

If Breakeven Even Volume (BEV) = fixed costs / (price-variable cost) then how many games does Sarah need to sell to make a profit of $500,000.

Sarah has launched the EU marketing plan for Utter Mayhem and expects to sell 100,000 units in addition to those sold in the US. The retail price for the units sold in the EU is $60 USD. The distributor expense adds an additional $5 to the unit variable cost for each unit sold in the EU and fixed costs increase by $25,000. What are the firm’s TOTAL profits for both the US and the EU if it sells 75,000 games in the US?
HINTS:
• You need to determine Sarah’s new fixed costs AND her variable cost for each unit sold in the EU.
• Make sure you account for units sold in the US and the EU
• You are looking for TOTAL profits

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Answer #1

Answer:

a) Fixed cost = $1,200,000

Price = $55

Unit variable cost = $28

Let the units to be sold for $500000 be X.

Revenue = Price * Units sold = 55X

Cost = Fixed cost + Variable cost = 1200000 + 28X

Profit = Revenue - Cost

= 55X - (1200000 + 28X)

This should be equal to 500000

Hence, 27X - 1200000 = 500000

X = 1700000/27 = 62963

Hence, Sarah needs to sell 62963 games to make a profit of $500000

b) Games sold in US = 75000

Revenue = 55 * 75000 = $4125000

Costs = 1200000 + 75000 * 28 = 3300000

Profit from US market = Revenue - Cost

= 4125000 - 3300000

= $825000

Games sold in EU = 100000

Price = $60, Unit variable cost = $33

Revenue = 60 * 100000 = $6000000

Cost = Fixed cost + Variable cost = 1225000 + 33 * 100000 = $4525000

Profit from EU market = Revenue - Cost

= 6000000 - 4525000

= $1475000

Hence, total profits = $825000 + $1475000 = $2300000

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