In the Break Even analysis problem, there are three scenarios that the Timbuk 3 video game company must decide upon in order to come up with the most profit. The first scenario begins with breaking even as after estimated sales of 500,000 units at a profit of $50 per video game minus anticipated sales per unit cost, production costs, and anticipated advertising costs would generate a profit of $0, thus breaking even. In the second scenario, manager Mark Hobson believes that company should lower the cost of the anticipated sales per unit to $35 per game and keep the same advertising budget, that the number of sales will double the number of the sales from the first scenario to 1,000,000 units.
A second manager, Michelle Woodard, believes that being more aggressive with advertising and increase the budget by 33% will increase the number the estimated number of units sold to 750,000 units without changing the price of the unit. .
The best scenario is the scenario is obviously the scenario, which generates the most income for the Timbuk 3 Company. However, we must remember that all three scenarios are only estimates and that each scenario must be evaluated for a margin of safety as well in order to choose the best scenario. The first scenario is to do nothing and not become either more aggressive with the anticipated sales of the unit or the advertising campaign. However, the gain and loss for the release of the game Snowboard Challenge for the Timbuk 3 Company is $0. Although $0 is a better scenario than a loss for the company, no company has the objective to put in the time and effort into a project and then desire to break even. Because the result with the first scenario is to break even, there is no margin of safety as the first scenario is estimated to neither have a loss nor profit.
In the second scenario, Mark's strategy to be more aggressive with the anticipated sales price per unit of the game and lower the cost of the game to $35 per unit and in turn, expects to sell twice the amount of units.