Question

The BigDog company has developed a new video game, which it intends to sell directly to consumers via the internet. At a selling price of $59 BigDog estimates that it can sell 300,000 units. It costs $25 per unit to produce each video game, and another $7 per unit in distribution expenses. If BigDog incurs fixed overhead expenses per year of $5 million, how much net profit will it earn?

Answer 1

Number of Units Sold = 300,000

Sales = Selling Price per unit * Number of Units Sold
Sales = $59 * 300,000
Sales = $17,700,000

Production Cost = Cost per unit * Number of Units Sold
Production Cost = $25 * 300,000
Production Cost = $7,500,000

Distribution Expense = Distribution Expense per unit * Number of Units Sold
Distribution Expense = $7 * 300,000
Distribution Expense = $2,100,000

Net Profit = Sales - Production Cost - Distribution Expense - Fixed Overhead Expenses
Net Profit = $17,700,000 - $7,500,000 - $2,100,000 - $5,000,000
Net Profit = $3,100,000