Question

2. Philistine Inc., the maker of personal computer games has been contacted by Super Fast Inc., which has developed a new technology for personal computer gamers which provides a new challenge for gamers. The new technology consists of a seat pad for the gamer's chair which is connected to a control unit which is connected to the personal computer. When the gamer makes an error while playing Raceway 500 he/she receives a "mild" electric shock through the seat pad. The new technology, which has received extremely positive reviews from a panel of gamers, consists of the Raceway 500 game CD, the seat pad, the control unit and cables. In tests, by Philistine Inc., the new technology has performed flawlessly, is considered safe and Philistine Inc. is considering licensing Super Fast's new gamer technology. The following cost information pertains to the new technology: Super Fast Raceway 500 Software License..... .$125,000 New Equipment To Produce Seat Pads. $75,000 Advertising and promotion $125,000 Material & Royalties "Raceway 400" Game (per 100 CDs).....$500 Material & Labor For Seat Pad (per 10 pads) .$150 Control Unit And Cables (per unit)... $5 Market research estimates that the market for the new Raceway 400 game and equipment is 1,000,000 units at a retail price of $90, which includes the game CD, seat pad, control unit and cables. Philistine Inc. traditionally sells through major retailer clubs like Costco or Sam's. The club's traditional margin is 10%. a. How much revenue does Philistine Inc. receive for each unit sold? b. What is Philistine Inc.'s contribution margin per unit? c. What is the break-even volume in units? d. How many units did Philistine sell if Total Sales Revenue = $1,000,000? e. What is the profit if Philistine's Total Sales Revenue = $1,000,000?_

Answer 1

Ans.A.

Estimated number of sale units = 1,000,000 units

Estimated retail price = $90

Philistine’s margin = 10%

So, if Philistine’s sale price was x, the club’s 10% margin on Philistine’s sale price = 0.10x,

The retail price would be x+0.10x, and the retail price is $90

So, x+0.1x = $90

1.1x = $90

X= $90/1.1 = $81.81

So, Philistine’s sale price = $81.82

It receives $81.82 for each unit sold

Ans.B.

Contribution income statement	Per unit
Sales	$81.82
Less: Variable costs
Material & Royalties "Raceway 400 game"	$5.00
Material & labour for seat pad	$15.00
Control unit & cables	$5.00
Total variable costs	$25.00
Contribution margin	$56.82

So, Philistine Inc.’s contribution margin per unit = $56.82

Ans.C.

Break even point (in units) = Total Fixed cost / (Selling price per unit – Variable cost per unit)

Fixed costs	Amount
Super Fast Raceway 500 Software License	$125,000.00
New equipment to produce seat pads	$75,000.00
Advertising & Promotion	$125,000.00
Total fixed costs	$325,000.00

So, break even point (in units) = $325,000/($81.82 - $25)

= $325,000/$56.82

=5719.8 or 5720 units

Ans.D. If total sales revenue = $1,000,000, sale price per unit for Philistine (as in answer A above) = $81.82

So, units sold = $1,000,000/$81.82

= 12,221.95 or 12,222 units

Ans.E. Contribution margin per unit = $56.82

So, for 12,222 units, total contribution margin = 12,222 units*$56.82 = $694,454.04

Profit = Contribution margin – Fixed costs

= $694,454,04 - $325,000

=$369,454.04