Assume that World of Warcraft and Final Fantasy 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:

World of Warcraft Final Fantasy

Selling price per unit 150 150

Variable cost per unit

Direct material $ 26.00 $ 26.00

Direct labor 7.50 30.00

Overhead 7.50 30.00

Selling and administrative 3.00 3.00

Annual fixed costs Overhead $ 600,000 $ 240,000

Selling and administrative 135,000 135,000

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?