Question

Please explain as well.

Exercise 6.20 a-c 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 $285 per copy. Variable costs to produce and sell the video game amount to $70 per copy. Fixed costs amount to $453,650. The company anticipates selling 400 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 the amount of operating income the company will earn if it takes 11 months for a competitor to produce a more sophisticated version of the video game. Operating Income Calculate how many units of the video game the company will have to sell in order to break even. Units to break even units If the company wishes to earn $26,350 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 4 months. Assume that unit sales are 400 copies per month. (Round answer to 2 decimal places, e.g. 15.25.) Selling price per unit

Answer 1

Exercise 6.20 a-c

a) Calculation of Operating Income the company will earn if it takes 11 months for a competitor to produce a more sophisticated version of the video game:

PARTICULARS	AMOUNT (In $)
Sales Revenue (285x400x11)(A)	12,54,000
Less: Variable Cost (70x400x11)(B)	3,08,000
Contribution Margin (C=(A-B))	9,46,000
Fixed Costs (D)	4,53,650
Operating Income (E=(C-D))	4,92,350

b) Calculation of units of video game the company will have to sell in order to break-even:

Break-Even point in units= Fixed Cost/(Sales Price per unit-Variable Cost per unit)

Fixed Cost= $4,53,650

Sales Price per unit=$285

Variable Cost per unit=$70

Therefore,

Break-Even Point=4,53,650/(285-70)=2110 units

c) Calculation of selling price of the video game if the company wishes to earn $26,350 over the product’s life and a competitor introduces a more sophisticated version of the video game in 4 months assuming unit sales are 400 copies per month:

Let the Selling Price per unit be Z.

PARTICULARS	AMOUNT (In $)
Sales Revenue (Zx400x4)(A)	1600Z
Less: Variable Cost (70x400x4) (B)	1,12,000
Contribution Margin (C=(A-B))	1600Z-1,12,000
Fixed Cost (D)	4,53,650
Operating Income (E-(C-D)) (Given Figure)	26,350

Now, C-D=E

Therefore,

(1600Z-1,12,000)-4,53,650=26,350

1600Z-5,65,650=26,350

1600Z=26,350+5,65,650

1600Z=5,92,000

And, Z=5,92,000/1600

Z=370

Therefore selling price of per unit of video game is $370

Exercise 6.21 a-b

a) Calculation of required sales to meet the target operating income during 2020:

Let the Sales Revenue be Z.

PARTICULARS	AMOUNT (In $)
Sales Revenue (A)	Z
Less: Variable Cost (Zx30%) (B)	0.30Z
Contribution Margin (C=(A-B))	0.70Z
Fixed Cost (D)	38,980
Target Operating Income (E-(C-D)) (Given Figure)	1,58,000

Now, C-D=E

Therefore,

0.70Z-38,980=1,58,000

0.70Z=1,58,000+38,980

0.70Z=1,96,980

And, Z=1,96,980/0.70

Z=2,81,400

Therefore required sales to meet the target operating income during 2020=$2,81,400

b) Summary of Income Statement for 2020 based on answer to Part a:

PARTICULARS	AMOUNT (In $)
Sales Revenue (A)	2,81,400
Less: Variable Cost (2,81,400x30%)(B)	84,420
Contribution Margin (C=(A-B))	1,96,980
Fixed Costs (D)	38,980
Operating Income (E=(C-D))	1,58,000