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AcmeGame Is Their Game Over Financial Question

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December 2007
Question 1:
DAILY FINANCIAL TIMES
AcmeGame: is their game over?
Four years ago, AcmeGame launched the pathbreaking mathematical mind game,
Virtual, in download form. For an annual fee you get access to a fresh problem every
day. To everyone’s astonishment it was a runaway success and enrolled 100 000 users.
The secret that made it difficult to imitate was the underlying mathematical algorithms
that created fresh mind games. Then two years ago MegaCorp cracked the problem
and came out with WorkOut, which was cheaper than Virtual and had the added
attraction of having different difficulty levels. This was partly due to the fact that
MegaCorp had poached some of AcmeGame’s key development employees. Workout
increased the market and took away about a quarter of AcmeGame’s customers
immediately and now has half the market. AcmeGame has slashed the price of Virtual
and put the contract on a monthly basis, but neither game has attracted new
customers in the past year.
MegaCorp took a chance at the same time as launching WorkOut in bringing QuizNight
to market, which provided downloadable general knowledge quizzes. It was an even
bigger success and last year AcmeGame followed with a copycat version called
WhoKnows. The quiz market is booming and while WhoKnows is selling in large
numbers, it has made a relatively small impression in terms of market share. That is
probably because it is really no different from QuizNight and MegaCorp immediately
matched WhoKnow’s lower price.
AcmeGame claims to be a profitable company, but it is not generating much cash at
the moment. It is also investing heavily in the new product, Thinker, which it refuses to
describe in detail but is undoubtedly a risky project. The inevitable conclusion is that
AcmeGame has lost its competitive edge and is heading for disaster.
AcmeGame Plc
Operating Account at end year: Production cost, and revenue ($000)
SALES
REVENUE
31 850
COST OF GOODS SOLD
23 008
GROSS
PROFIT
8 842
Operating Account at end year: Overheads and Operating Surplus ($000)
Corporate
1 500
Facility overhead
500
Hiring & redundancy cost
900
Development expenditure
3 000
TOTAL OVERHEAD
5 900
OPERATING
SURPLUS
2 942

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Cash Flow for year ($000)
OUTLAY
INCOME
Equipment purchase
1 000
Material purchase
1 800
Loan interest
1 260
Interest on
assets
280
Wage cost
9 000
Support cost
3 250
Equipment cost
2 055
Product development
2 626
Product marketing
5 063
Total overhead
5 900
Sales
revenue
31 850
Total outlay
3 1954
Total income
32 130
Net Cash
Flow
176
Balance Sheet at end year ($000)
FIXED ASSETS
Buildings
14 000
Equipment
8 000
TOTAL FIXED ASSETS
22 000
CURRENT ASSETS
Raw materials
1 000
Cash
4 000
TOTAL CURRENT ASSETS
5 000
TOTAL ASSETS
27 000
OWNERS EQUITY
13 000
DEBT
Long-term loan
14 000
TOTAL DEBT
14 000
TOTAL LIABILITIES
27 000
Report on Products for last year
Virtual
WhoKnows
Virtual
WhoKnows
Market share (%)
50
25
Orders (units)
75 000
20 000
Price ($/unit)
350
280
Competing price ($/unit)
380
280
Account at end year
Wage cost ($000)
7 000
2 000
Telephone support cost ($000)
2 250
1 000

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December 2007 Question 1: DAILY FINANCIAL TIMES AcmeGame: is their game over? Four years ago, AcmeGame launched the pathbreaking mathematical mind game, Virtual, in download form. For an annual fee you get access to a fresh problem every day. To everyone’s astonishment it was a runaway success and enrolled 100 000 users. The secret that made it difficult to imitate was the underlying mathematical algorithms that created fresh mind games. Then two years ago MegaCorp cracked the problem and came out with WorkOut, which was cheaper than Virtual and had the added attraction of having different difficulty levels. This was partly due to the fact that MegaCorp had poached some of AcmeGame’s key development employees. Workout increased the market and took away about a quarter of AcmeGame’s customers immediately and now has half the market. AcmeGame has slashed the price of Virtual and put ...
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