Case 11-3. Break-even analysis
Aquarius Games Inc. has finished a new video game, Triathlon Challenge. Management is now considering its marketing strategies. The following information is available:
Two managers, Haley Chipana and Dan Gillespie, had the following discussion of ways to increase the profitability of this new offering:
Haley:I think we need to think of some way to increase our profitability. Do you have any ideas?
Dan:Well, I think the best strategy would be to become aggressive on price.
Dan:If we drop the price to $60 per unit and maintain our advertising budget at $15,000,000, I think we will generate sales of 2,000,000 units.
Haley: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.
Haley:If we increase our advertising to a total of $20,000,000, we should be able to increase sales volume to 1,200,000 units without any change in price.
Dan: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 Dan Gillespie? Or follow Haley Chipana’s strategy?
Read Case 11-3. Choose the best strategy and justify your decision based on appropriate accounting principles.