Reference no: EM132526315

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

• The cost of the video game, packaging, and copying costs.
• 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 that's the wrong way to go. You're giving too much up 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 don't think that's reasonable. We'll never cover the increased advertising costs.

Question 1: Which strategy is best: Do nothing? Follow the advice of Thomas Seymour? Or follow James Hamilton's strategy?