Question

Vita Ltd. manufactures and distributes board games. The company has been in business for many years and has been successful. Performance has been squeezed in recent years by other forms of entertainment. The CEO is giving some thought to different pricing strategies for his products and wants to know the impact of the choices. One of the ideas is to re duce the selling price by 5 percent on all products. He thinks that by doing this sales volume will increase by 18 percent. During 2017, Vita produced and sold 500,000 games for $20 each. The cost of producing each game was $12.50 (cost of sales). All other costs of operating the business were $3,550,000. Cost of sales per unit would remain the same ($12.50) under the new pricing strategy and the other costs would remain $3,550,000.

Required:
a. If the CEO implemented the new strategy and his estimates were correct, determine the following using the 2017 as the basis for your calculations,
i. Sales in dollars and quantity
ii. Cost of sales
iii. Gross margin
iv. Net income
v. Gross margin percentage
vi. Profit margin percentage
b. Explain why Vita could make more money even though it has a lower gross margin.
c. Do you think Vita should undertake the proposed strategy? Explain. Do you see any drawbacks?



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  • CreatedFebruary 26, 2015
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