Profitability Strategies

Somerset Inc. has finished a new video game, Snowboard Challenge. Management is now considering its marketing strategies. The following information is available:

Anticipated sales price per unit	$ 80
Variable cost per unit	$ 35
Anticipated volume	1,000,000	units
Production costs	$20,000,000
Anticipated advertising	$15,000,000

Two managers, James Hamilton and Thomas Seymour, had the following discussion of ways to increase the profitability of this new offering:

James: I think we need to think of some way to increase our profitability. Do you have any ideas?

Thomas: Well, I think the best strategy would be to become aggressive on price.

James: How aggressive?

Thomas: If we drop the price to $60 per unit and maintain our advertising budget at $15,000,000, I think we will generate total sales of 2,000,000 units.

James: I think thats the wrong way to go. Youre giving up too much on price. Instead, I think we need to follow an aggressive advertising strategy.

Thomas: How aggressive?

James: If we increase our advertising to a total of $25,000,000, we should be able to increase sales volume to 1,400,000 units without any change in price.

Thomas: I dont think thats reasonable. Well never cover the increased advertising costs.

Which strategy is best and Why (explain)?: Keep the price and advertising budget as set, follow the advice of Thomas Seymour, or follow the advice of James Hamilton?

Provide evidence (calculations) to justify your strategy choice.

You are required to use the following format to submit your work. I am expecting two (2) pages, double-spaced, of narrative.

I. Introduction

II. Problem Identification

III. Course of Action

IV. Data Analysis

V. Conclusion