2. Firm X is about to launch a line of new athletic shoes and sets aside $300,00

ID: 1185811 • Letter: 2

Question

2. Firm X is about to launch a line of new athletic shoes and sets aside $300,000 for a new

advertisement. The firm hired an advertisement agency and paid $50,000 and reserve space in a

magazine, Road Runner. The price for the ad space is $250,000. If the firm cancelsthe

reservation, it has to pay a cancellation fee of $50,000. The management forecasts that the

advertisement would generate sales of 20,000 units. The unit contribution margin would be $20.

Recently, however, a major competitor launched a new line of athletic shoes. The firm now

revises sales forecast downward to 14,000 units, with the unit contribution margin remaining the

same. Should the firm cancel the launch?

initially = 20000*20 = 400,000 $ profit

now = 14000*20 = 280,000 $ profit
but cost = 300,000 $ for advertisement

hence firm should cancel the launch

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.