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:Required: (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?

Question

What will be an ideal response?

Answer 1

Answers will vary
(a) Contribution margin per unit:


(b) Contribution income statements:


(c) Increase in NI with a 10% increase in sales volume:


(d) The lower the fixed costs, the more stable will be net income. Because Sony has approximately half the fixed costs of Microsoft, its earnings should be more stable. Note also that Sony's unit contribution margin is considerably less than Microsoft's. As sales rise, Microsoft will gain contribution margin (and thus profit) faster than Sony and, of course, when sales fall will lose contribution margin faster than Sony.