Assume that Microsoft and Sony both plan to introduce a new hand-held video game. Microsoft plans to use a heavily automated production process to produce its product while Sony plans to use a labor-intensive production process.

The following revenue and cost relationships are provided:

(a) Compute the contribution margin per unit for each company.

(b) Prepare a contribution income statement for each company assuming each company sells 8,000 units.

(c) Compute each firm's net income if the number of units sold increases by 10%.

(d) Which firm will have more stable profits when sales change? Why?

 

Microsoft Game Sony Game 150 150 Selling price per unit Variable costs per unit Direct materials 27.00 $ 27.00 Direct labor 7.50 30.00 Overhead 7.50 30.00 Selling and administrative Annual fixed costs 3.00 3.00 Overhead 600,000 $ 240,000 Selling and administrative 135.000 135,000 %24 %24