Electronic Arts (EA) distributes DVD games to retail stores and game parlours. It has a simple business model: Order the DVD games, catalogue the games on EAJs website, deliver and provide on-site support, and bill and collect from the customers. EA reported the following costs in April 2012:
In April 2012, EA purchased 12,000 game DVDs at an average cost of $15 per DVD, and it sold them at an average price of $22 per DVD. The catalogue on the website and the customer interactions that occur during delivery are EA's main marketing inputs. EA incurs no other costs.
1. Calculate EA's operating income for April 2012. If the monthly investment in EA is $300,000, what rate of return on investment does the business earn?
2. The current crop of game systems is maturing, and prices for games are beginning to decline. EA anticipates that from May' onward, it will be able to sell 12,000 game DVDs each month for an average of $18 per DVD, and it will have to pay vendors an average of $12 per DVD. Assuming other costs are the same as in April, will EA be able to earn its 15% target rate of return on investment?
3. EA5s small workforce gathers as a team and considers process improvements. They recommend "firing" the marginal vendors-those who need a lot of "hand holding" but whose titles are not very popular.
They agree that they should shift some of their resources from vendor relationships and cataloguing to delivery and customer relationships. In May 2012, EA reports the following support costs:
At a selling price of $18 and a cost of $12 per DVD, how many game DVDs must EA sell in May 2012 to earn its 15% target rate of return on investment?