Question

4. Lily is the brand manager for the Microsoft XBox. She sells her product to Best Buy for $199 and Best Buy sells it at a retail price of $269 to consumers. Sales were going well; in 2008, Lily sold 3 million units of the XBox. But now, sales were beginning to slow down. To get sales moving again, Lily wanted to launch a $20 million advertising campaign targeted to senior citizens which would feature the new XBox Fit game. Lily knew that her product was very profitable, with variable costs of $100, so it seemed like she could afford to spend money advertising the product. She submitted her advertising plan to her boss Jess. Jess liked the idea, but asked Lily how many incremental units of product she would have to sell to breakeven on the advertising investment, and whether this quantity was feasible, given current sales levels. What is the breakeven point? Can Lily feasibly sell this quantity if she runs her advertising campaign? Why or why not?

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Answer 1

Solution:

Given that,

Lily is the brand manager for the Microsoft XBox. She sells her product to Best Buy for $199 and Best Buy sells it at a retail price of $269 to consumers.

Sales were going well; in 2008, Lily sold 3 million units of the XBox. But now, sales were beginning to slow down.

To get sales moving again, Lily wanted to launch a $20 million advertising campaign targeted to senior citizens which would feature the new XBox Fit game.

Lily knew that her product was very profitable, with variable costs of $100, so it seemed like she could afford to spend money advertising the product. She submitted her advertising plan to her boss Jess.

Jess liked the idea, but asked Lily how many incremental units of product she would have to sell to breakeven on the advertising investment, and whether this quantity was feasible, given current sales levels.

What is the breakeven point? Can Lily feasibly sell this quantity if she runs her advertising campaign? Why or why not:

The breakeven point= [Fixed investiment]/(Price per unit - Variable cost per unit]

=202020.2 or 202020

Lily already sells 3 million units in 2008, then she can feasibly sell the additional 202020 units to recover the investiment.

It will happen because 202020 or more units will be demanded due to advertising elasticity of demand and it is very small potion of the existing sales already taking place in the year 2008.

So. Lily should run the advertising campaign.