1 answer

Monster Inc. markets personal computer games through a variety of retail outlets. Presently, Monster is faced...

Question:

Monster Inc. markets personal computer games through a variety of retail outlets. Presently, Monster is faced with a decision as to whether it should obtain the distribution rights to a new technology for personal computer gamers The new game consists of the Daytona 500 game CD, driver seat pad, and control unit with cable (one of each is required per computer to play the game).

The retailer’s margin will be 20%. Other data available are as follows:

            Hot Stuff Daytona 500 Software License (per year).......................................$200,000

            Annual interest payments.................................................................................. $50,000

            Cost of package design (per year) .................................................................. $150,000

            Annual Advertising and promotion.......................................................................... $20

            Royalties for “Daytona 500” Game (per CD)............................................................ $10

            Control Unit and Cable (per unit)................................................................................ $5

            Material & Labor for Seat Pad (per pad).......................... $150

The suggested retail price is $824

Answer the following questions:

  1. What is the price at which Monster must sell to the retailers?
  2. What is VCI’s unit contribution?
  3. What is the break-even point in units?

MUST SHOW WORK FOR CREDIT.


Answers

ANSWER

Part 1

Retail price is including the Margin of the retailer which is 20%.

Assuming the retail price is 120% and sale price to retailer is 100% we get sale price.

Retail Price

$824

Sale price

100%

Retailer margin

20%

Sale price (824/120%*100%)

$ 686.66

Check

Retailer purchase price

$ 686.66

Add: Retailer Margin (686.66*20%)

$137.33

Retail price

$ 824

Part 2

Calculation of Contribution Margin

Sales Price

$ 686.66

Less: Variable Costs

Advertising and Promotion

$ 20.00

Royalty for Kelly 500 game

$ 10.00

Control unit and Cable

$ 5.00

Material and labor for Seat Pad

$ 150.0

Total Variable Cost

$185.00

Contribution margin per game

$ 501.66

Contribution is Sale price Minus Variable cost per unit.

Part 3

Breakeven point=

(fixed cost /Contribution per Unit)

Fixed costs

Software license

$ 200,000.00

Annual Interest Payment

$ 50,000.00

Cost of Package Design

$150,000.00

Total Fixed cost

$ 400,000.00

Breakeven point=

($400000/$285.33)

Breakeven point=

797.35

or

797 Units Appr

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