Garbo Gaming sells digital games for all sorts of portable d

Garbo Gaming sells digital games for all sorts of portable devices at $7 each. The variable cost per game is $5. At current annual sales of 200,000 games, the company is just breaking even. It is estimated that if the creators\' royalties are reduced, the variable cost per game will drop by $1. Assume creators\' royalties are reduced and sales remain constant; how much more money can the company put into advertising (a fixed cost) and still break even?

Solution

At break-even

Total Sales = Total Variable Cost + Total Fixed Cost

(7 * $200,000) = (5 * 200,000) + Total fixed Cost

Total fixed cost = $400,000

Now the Variable cost will drop by $1. This means new VC = $5 - $1 = $4

Now we need to calculate the new fixed cost,

(200,000 * 7) = (200,000 * 4) + Fixed Cost

Fixed Cost = $600,000

Additional money that company can put for advertising = New Fixed Cost - Old Fixed cost = $600,000 - $400,000 = $200,000