Accounting and Finance

Accounting and Finance

Question 1

Part 1

Raising price and advertising cost

Raising price and advertising cost might turn out to be profitable when considering all the external factors, but as far as internal factors are concerned, we need to calculate the profit that the business will achieve through this method. The increase in price would make its total sales increase up to $963,200. The increase of $56000 in the advertising cost would allow the firm to have a total cost of $946400 from prior total cost of $890400. Considering this whole situation, the overall profit would be $16800, from $5600, which means a growth in profit of 300%. Now, this needs to be considered that these calculations are hypothetical as we still do not know, that what is the price elasticity of demand for this particular business.

Increase production and decrease price

This approach says that the firm should keep the factory running at full capacity if the selling price is to be reduced by 5%. This would mean that the overall sales will increase from $896,000 to $1,330,000. This would increase the overall profits from $5600 to $439,600. This approach is again hypothetical as we still do not know, that what is the price elasticity of demand for this particular business.

Increase promotion to boost turnover

Mary, 'Deputy Chief for marketing' is of the view that more should be spent on advertising and promotions. She says that a sales promotion campaign costing $21,000 would boost sales to 56,000 games per year at the current price. This means that the overall cost will rise from $890,400 to $911,400. On the other hand, this expense will also increase the sales of the business. This would lead to increase in sales from $896,000 to $952000. According to the given scenario, the profit would increase from $5600 to $40600. This approach is again hypothetical as we still do not know, that what is the price elasticity of demand for this particular business.

Increase in variable cost, distribution cost for the sale of 14000 more units

Eric from their exporting agent advises that a distributor in France is willing to buy 14,000 Pluto Pup games per year if a reasonable price can be negotiated. The labeling and quality would have to be enhanced to suit EU regulations though, and this would increase factory variable expenses by $1.25 per unit. There would be a single distribution expense of $42,000 for this order; however there would be no sales commission to pay on this order. While considering this situation, the overall revenue, at current price of $20 per unit, would be $1,176,000. As far the cost is concerned, the marginal increase in cost would be $17500, for the 14000 units. This would eventually lead to a overall increase of $73500, which will lead to the total cost of $963,900. This approach is again hypothetical as we still do not know, that what is the price elasticity of demand for this particular business. The breakeven by this approach would be at 17161 units as the ...