Problem 1: Assume that Sony and Microsoft both plan to introduce a new hand-held video game. Sony plans to use a heavily automated production process to produce its product while Microsoft plans to use a labor-intensive production process. The following revenue and cost relationships are provided:

	Sony Game	Microsoft Game
Selling price per unit	$100	$100
Variable costs per unit
Direct materials	$18.00	$18.00
Direct labor	5.00	20.00
Overhead	5.00	20.00
Selling and administrative	2.00	2.00
Annual fixed costs
Overhead	$400,000	$160,000
Selling and administrative	90,000	90,000

Required:

1. Compute the contribution margin per unit for each company.
2. Prepare contribution income statement for each company assuming each company sells 8,000 units.
3. Compute each firm's net income if the number of units sold increases by 10%
4. Which firm will have more stable profits when sales change? Why?