Electronic Arts (EA) distributes video games to retail stores and video-game parlors. It has a simple business model: Order the video games, catalog the games on EA's Web site, deliver and provide on-site support, and bill and collect from the customers. EA reported the following costs in April 2006:

In April 2006, EA purchased 12,000 video-game disks at an average cost of $15 per disk, and it sold them at an average price of $22 per disk. The catalog on the Web site and the customer interactions that occur during delivery are EA's main marketing inputs. EA incurs no other costs.
Required
1. Calculate EA's operating income for April 2006. 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 disks each month for an average of S18 per disk, and it will have to pay vendors an average of $12 per disk. Assuming other costs are the same as in April, will EA be able to earn its 15% target rate of return on investment?
3. EA's 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 cataloging to delivery and customer relationships. In May 2006, EA reports the following support costs:

Ata selling price of $18 and a cost of $12 per disk, how many game disks must EA sell in May 2006 to earn its 15% target rate of return on investment?

Cost per Unit Activity Ordering Cataloging Delivery and support Billing and collection Cost Driver Quantity of Cost Driver Number of game vendors Number of new titles Number of deliveries Number of customers $250 per vendor 20 400 300 $100 per title $15 per delivery $50 per customer Cost per Unit Activity Ordering Cataloging Delivery and support Billing and collection Cost Driver Ouantity of Cost Driver Number of game vendors Number of new titles Number of deliveries Number of customers 30 15 450 300 $200 per vendor $100 per title $20 per delivery $50 per customer