Appy Daze Ltd has produced a smart phone application (app) that enables users to test their blood pressure by holding their phones to their ears. The company’s fixed costs, which include the development of the app, total £30,000. Users pay 50p to download the app, of which Appy Daze Ltd receives 35p after deducting the phone manufacturer’s commission. There are no variable costs other than the commission.
During 2013 it expects that potential maximum downloads could be 200,000.
(a) Calculate by formula the number of downloads that must be made for the company to break even. (Hint: use the formula Fixed Costs divided by Contribution per download.)
(b) Calculate by formula the company’s likely profit or loss if only 60,000 downloads are paid for. (Hint: use the formula Total contribution – Fixed costs)
(c) Calculate by formula the number of downloads that would have to be made for Appy Daze Ltd to make a profit of £50,000. (Hint: use the formula ([Fixed Costs + £50,000]/Contribution per download.)
(d) A local medical supplies company, Healthy Heart plc, has asked Appy Daze Ltd to create a variation of the blood pressure app to incorporate an advert for Healthy Heart. The extra cost to Appy Daze Ltd of creating the app would be £5,000, which would not be reimbursed by Healthy Heart. Users would pay only 40p to download this version of the app, and Appy Daze would receive 30p after commission from each download. Healthy Heart would pay Appy Daze Ltd 20p for every user of the modified app who clicks through to Healthy Heart’s website. It is estimated that 40,000 downloads of this app will be made, and half of this total will click through to Healthy Heart’s website. Advise Appy Daze Ltd (using appropriate formulae) whether they should accept the contract from Healthy Heart plc.
(Hint: calculate the total extra contribution generated from this app and compare it to the additional fixed costs).
(e) Show the information relating to the ‘original’ app (i.e. excluding the Healthy Heart contract) in the form of a break-even chart.