Question

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eGame Inc. manufactures game systems. eGame has decided to create and market a new system with wireless controls and excellent video graphics. eGame's managers are thinking of calling this system the Yew. Based on past experience, they expect the total life cycle of the Yew to be four years, with the design phase taking about a year. They budget the following costs for the Yew: . X i Budget Total fixed costs Variable cost over four years per unit 6,550,000 Year 1 R&D costs Design costs 1,460,000 Years 2-4 $44 per unit Production 19,620,000 $12 per unit Marketing and distribution 5,238,000 Customer service 3,100,000 Requirement 1. Suppose the managers at eGame price the Yew game system at $145 per unit. How many units do they need to sell to break even? (Round your answer up to the nearest whole unit.) eGame will needunits to break even. Requirement 2. The managers at eGame are thinking of two alternative pricing strategies. (a) Sell the Yew at $145 each from the outset. At this price, they expect to sell 1,620,000 units over the selling price of the Yew in year 2 when it first comes out to $230 per unit. At this price, they expect to sell 96,000 units in year 2. In years 3 and 4, drop the price to $145 per unit. The managers expect to sell 1,280,000 units in years 3 and 4. Which pricing strategy is recommended? Explain. slife cycle; (b) Boost In order to effectively answer this question, we must first determine the operating income under each option. First calculate the life cycle operating income (loss) for option (a). (Enter operating losses with parentheses or a minus sign.) Projected Life Cycle Statement of Comprehensive Income Revenues Variable costs Fixed costs Life cycle operating income (loss) minus sign.) Now calculate the life cycle operating income (loss) for option (b). (Enter operating losses with parentheses or Projected Life Cycle Statement of Comprehensive Income Revenues Variable costs Fixed costs Life cycle operating income (loss) Which pricing strategy is recommended? Explain. A. Option B because it results in an overall higher variable costs over the product's life cycle. O B. Option B because it results in an overall higher operating income over the product's life cycle. O C. Option A because it results in an overall higher variable costs over the product's life cycle O D. Option A because it results in an overall higher operating income over the product's life cycle. Requirement 3. What other factors should eGame consider in choosing its pricing strategy? Select all that apply. A. Competitor reaction B. Pricing in global markets C. Employee reaction D. Income tax considerations E. Changes in customer preferences

Answer 1

Break even units = fixed cost / contribution margin per unit

contribution margin per unit =sales price per unit - variable costs

=[6,550,000+1,460,000+19,620,000+5,238,000+3,100,000]/ [145-44-12]

= 35,968,000/89

=404135units to break even that is no profit no loss.

requirement 2

alternative 1

	$	WORKING
REVENUE	234,900,000	1620000*145$
VARIABLE COST	90,720,000	1620000*56 [44+12]
FIXED COST	35,968,000
LIFE CYCLE OPERATING INCOME	108,212,000	[234900000-90720000-35968000]

ALTERNATIVE 2

REVENUE	207,680,000	[96000*230+1,280,000*145]
VARIABLE COST	77,056,000	[96000+1280000]UNITS*56$ PER UNIT
FIXED COST	35,968,000	REMAINS CONSTANT
LIFE CYCLE OPERATING INCOME	94,656,000

REQUIREMENT 3

ALTERNATIVE A GENERATES HIGHER INCOME THAN ALTERNATIVE B

ANSWER D

REQUIREMENT 4

various internal and external factors affects pricing decision.

this factors includes

(1)Demand for product (2) competition (3) employee's cooperation (4) consumer behaviour (5)gloabal markets (6) macro economic trends (7) Income tax rates etc

answer all the given should be considered in choosing pricing strategy.