Cool Games Corporation derives all of its revenues through the sales of video games. Last year, it fell just short of making a profit although it had strong revenues of $200 million worldwide, half from children and half from adults. This year, the company's sales to children rose 20% to $120 million, but its sales to adults dropped 40% to a disappointing $60 million. One of the most renowned Wall Street analysts had forecasted that Cool Games Corporation would need to at least match its revenues of last year in order to have a chance to make a profit on video games this year. Upon hearing the news of the Cool Games Corporation's revenue, the analyst concluded that it was not possible for the company to have made a profit this year.
The analyst's conclusion is based on which of the following assumptions?
The key to this question is noticing the difference between the revenue and profit. The revenue from last year was 200 million. However, this doesn’t tell us much about profit, which is how much a company makes after operation costs/expenses.
In this case, the video game company’s revenue may have been lower for this year, yet if its total expenses were less than those of last year, the company may end up being more profitable this year.
What does this depend on? On whether the amount the company lost in revenue (20 million according to the numbers) is less than what the company saved in total expenses.
So if the company costs 100 million to operate the first year, then as long as its total costs were <80 million, (or decreased by more than 20 million) it will be more profitable.
The analyst, in stating that the company is unable to make a profit, is assuming that its total costs did not decrease by more than 20 million. Therefore the answer is (A).
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