Company Y is a monopoly industry. Its contribution margin is estimated at 20% (P

Question

Company Y is a monopoly industry. Its contribution margin is estimated at 20% (P-MC)/P = 0.2). From past experience, the owner has determined the following relationship exists between expenditures on advertising and total sales: Advertising...................Sales Revenues $0..................................$90,000 $1,000.........................$100,000 $2,000.........................$109,000 $3,000.........................$117,000 $4,000.........................$124,000 $5,000.........................$130,000 $6,000.........................$135,000 $7,000.........................$139,000 $8,000.........................$142,000 $9,000.........................$144,000 $10,000........................$145,000 $11,000........................$145,000 What is the optimal level of advertising?

Explanation / Answer

It finance department has estimated its total cost function as ... Smith Corp. has determined that its contribution margin, (P – MC)/P, is 40%. ... study found the following relationship between adverting outlays and sales revenue. ... (in thousands of dollars), and A denotes advertising expenditures in hundreds of dollars.

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