Northern Lights Studios has finished a new DVD movie offering, Keeping in Balance. Management is now considering its marketing strategies. The following information is available:
Anticipated sales price per unit . . . . . . . $25
Variable cost per unit* . . . . . . . . . . . . . $5
Anticipated volume . . . . . . . . . . . . . . . 750,000
Movie production costs . . . . . . . . . . . . . $10,000,000
Anticipated advertising . . . . . . . . . . . . . $5,000,000
*The cost of the DVD disk, packaging, and copying costs.
Two managers, Julie Wilson and Steve Harris, had the following discussion of ways to increase the profitability of this new offering.
Julie: I think we need to think of some way to increase our profitability. Do you have any ideas?
Steve: Well, I think the best strategy would be to become aggressive on price.
Julie: How aggressive?
Steve: If we drop the price to $20 per unit and maintain our advertising budget at $5,000,000, I think we will generate sales of 1,600,000 units.
Julie: I think that’s the wrong way to go. You’re giving too much up on price. Instead, I think we need to follow an aggressive advertising strategy.
Steve: How aggressive?
Julie: If we increase our advertising to a total of $8,000,000, we should be able to increase sales volume to 1,500,000 units without any change in price.
Steve: I don’t think that’s reasonable. We’ll never cover the increased advertising costs.
Which strategy is best: Do nothing? Follow the advice of Steve Harris? Or follow Julie Wilson’s strategy?