Application of Accounting Principle Reflective Paper

Application of Accounting Principle Reflective Paper

Instructions/Descriptions

Application of Accounting Principle Reflective Paper

Read Case 11-3. Choose the best strategy and justify your decision based on appropriate accounting principles.

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Submission Instructions:

Your initial post should be 200-300 words, formatted and cited in current APA style.

You should respond to at least two of your peers by extending, refuting/correcting, or adding additional nuance to their posts.

Classmate post 1

In order to establish which strategy is best, the profits generated under each one need to be computed. Profits are computed by a simple formula, in this case, Profit = Revenue – Variable Costs – Fixed costs. Firstly, revenue is calculated by multiplying anticipated sales price per unit by anticipated sales volume in units.

Secondly, variable costs, which are costs that change accordingly to the activity base, are computed (variable cost per unit x anticipated sales volume in units).

Thirdly, fixed costs, that are cost that remain the same whether the activity base changes, are to be estimated (production costs + anticipated advertising costs). Finally, profits for each strategy are determined given each set of data.

To sum up:

Profit = Revenue* – Variable Costs** – Fixed costs***

* Revenues = anticipated sales price per unit x anticipated sales volume in units

** Variable costs = variable cost per unit x anticipated sales volume in units

*** Fixed costs = production costs + anticipated advertising costs

The Do-Nothing strategy:

Profit = ($75 x $800,000) – ($45 x $800,000) – ($9,000,000 + $15,000,000)

Profit = $0

This indicates that 800,000 units is the break-even point for the new video game.

Dan Gillespie’s advice:

Profit = ($60 x $2,000,000) – ($45 x $2,000,000) – ($9,000,000 + $15,000,000)

Profit = $6,000,000

Haley Chipana’s strategy:

Profit = ($75 x 1,200,000) – ($45 x $1,200,000) – ($9,000,000 + $20,000,000)

Profit = $7,000,000

The “do-nothing” strategy would report neither income nor loss for Aquarius Games Inc. since 800,000 is the break-even point. Dan’s strategy of reducing the price would generate $6,000,000 in profits, and Haley’s would report $7,000,000. Therefore, the best strategy is Haley’s, due to the fact that it is the one reporting the highest profits, which consist in maintaining the price and increasing advertising costs.

REFERENCE

Warren, Carl (2018). Survey of Accounting. Chapter 11 Cost-volume-profit-analysis. Pages 460,462,469

Classmate post 2

Application of Accounting Principles

Haley Chipana and Dan Gillespie, managers at Aquarius Games, are facing a dilemma. After the completion of a new game, Haley and Dan are seeking ways to increase the profitability of the game in order to break even with its advertising and production costs.

Haley suggests increasing the advertising budget; Dan suggests that increasing the price is a better idea. It is important to note that profitability differs from profit. Profitability is relative and is a measure of efficiency while profit is an absolute and quantifiable measure, typically in a dollar amount (Horton, 2019).

Of the two options, Haley has a better strategy and a better overall understanding of the difference between profitability and profit, as well as accounting principles. For a new video game that will be entering the market, it would seem likely that dropping the price for greater visibility and awareness would be a good idea.

However, in this case, a greater spend on advertising drums up the same awareness through paid media and earned media without losing sales numbers because of the lower price of the product.

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Based on accounting principles, Haley’s suggestion allows for financial statements to potentially reflect greater sales and greater revenue as its reporting will have had time for more advertisements to run. More advertisements can lead to greater awareness and more sales to be recorded on the financial statement.

Dan’s strategy is one that sacrifices actual profit to increase profitability. Lowering the cost of the game would ideally be smart, especially for price-sensitive customers, but the question is of increasing profitability rather than profit and sales.

For a new game that is looking to get attention and visibility in the market, more advertising is the way to go as it gets the product in front of more eyes. It also allows marketers to make changes and fix errors that are typical in newer video games. Haley’s strategy of increasing advertising spend is a better strategy.

Reference

Horton, M. (2019, March 31). The Difference Between Profitability and Profit. Retrieved April 13, 2020, from https://www.investopedia.com/ask/answers/012715/what-difference-between-profitability-and-profit.asp

Application of Accounting Principle Reflective Paper

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