Accounting Homework
analysis?
BA 421 – 2014-15 Term V Mid Term Exam Page 8
Irate Pigeons
Your company is developing a new phone game calledIrate Pigeons, which is set for release on July 1, 2015. Based on market research, there is a 77% chance that the game will sell poorly, a 20% chance that the game will sell okay, and a 3% chance that the game becomes an Internet Sensation. If you make the game available for free, forecasted downloads (in units) per fiscal quarter are as follows:
You spent $120,000 to develop the game and are hoping to recoup your investment and make a profit. There are several revenue models that you have researched, described below.
Freemium– Under this model, the game is free to download, and users have an option to buy a premium version with more characters and power-ups. 2% of all users will spend $5 for the premium version.
Pay-To-Download– Under this model, you will charge $5 for the user to download the game. If you use this model, your downloads will be only 1% of the forecasted numbers if the game does poorly, 3% of the forecasted numbers if the game does okay, and 10% of the forecasted numbers if the game becomes an Internet Sensation.
Bait-And-Switch– Under this model, you allow the game to be downloaded for free through the second quarter of 2016. At that point, players must pay $5 to continue playing the game or it will no longer be usable. You expect 40% of the people who have downloaded your game will pay this amount. Beginning the third quarter of 2016, the model becomes pay-to-download, as described above.BA 421 – 2014-15 Term V Mid Term Exam Page 9
In-Game Purchases– Under this model, you allow the game to be downloaded for free. You offer the ability for customers to spend money on new characters and in-game bonuses. During each quarter, 20% of new players buy an upgrade, 10% of players who downloaded the game the previous quarter will buy an upgrade, and 5% of players who downloaded the game two quarters ago will buy an upgrade. You price the upgrades at $1 each.
Advertising Revenue– Under this model, the game is downloaded for free, and you will receive $0.20 directly from advertisers for every download.
When a user pays money to you, 30% of the sales price must be paid for commissions. There are no other variable costs or fixed costs in the marketing and selling of the game.
Hint: Calculate the revenues that each model will earn separately, based on if the game will sell poorly, sell okay, or become an Internet Sensation, and use the expected value methods.
Required:
1. Determine which revenue model is the best under the following expectations:
a. The game will sell poorly
b. The game will sell okay
c. The game will become an Internet Sensation
2. Determine the expected revenues to be earned using each of the five pricing models.
3. Including the effects of the variable costs and fixed costs, determine the expected profit for each of the revenue models
4. What non-financial considerations should you consider in making your revenue model decision? You do not need to limit your answer to information provided in this problem.
5. Based on your answers above, which model should you use to earn money from your game?
-
Rating:
/5
Solution: Accounting Homework