The group product manager for ointments at American Therapeutic Corporation was
ID: 2357783 • Letter: T
Question
The group product manager for ointments at American Therapeutic Corporation was reviewing price and promotion alternatives for two products: Rash Away and Red Away. both Products were designed to reduce skin irritation, but red away was primarily a cosmetic treatment where as rash away also included a compound that eliminated the rash.
The price and promotion alternatives recommended for the two products by their respective brand mangers included the possibility of using additional promotion or a price reduction to stimulate sales volume. A volume, price, and cost summery for the products is as follows.
Rash Away Red Away
Unit Price $2.00 $1.00
Unit Variable Costs $1.40 $0.25
Unit Contribution $0.60 $0.75
Unit Volume 1,000,000 1,500,000
Both Brand Managers included a recommendation to either reduce price by 10 percent or invest an incremental $150,000 in advertising.
B-
How many additional sales dollars must be produced to cover each $1.00 of incremental advertising for Rash-Away? For Red Away?
Explanation / Answer
To cover the 150,000 advertising costs the products have to have a sales volume which is equal to the cost of advertising, we can calculate the required dollars of sales by using the profit equation as follows;For Rash away: x is the required units. Required profit = Selling price (x) - Variable cost (x) - Total fixed cost = Contribution margin per unit (x) - Total fixed cost 150,000 = $0.60 (x) - 150,000 0.60 (x) = 300,000 x = 300,000 / 0.60 x = 500,000 units Requires sales dollars (500,000 units x $2.0) = $1,000,000 So $1,000,000 sales reuired to meet the advertising cots of rash away. For Red away: x is the required units. Required profit = Selling price (x) - Variable cost (x) - Total fixed cost = Contribution margin per unit (x) - Total fixed cost 150,000 = $0.75 (x) - 150,000 0.75 (x) = 300,000 x = 300,000 / 0.75 x = 400,000 units Requires sales dollars (400,000 units x $1.0) = $400,000 So $400,000 sales reuired to meet the advertising cots of rash away. x is the required units. Required profit = Selling price (x) - Variable cost (x) - Total fixed cost = Contribution margin per unit (x) - Total fixed cost 150,000 = $0.75 (x) - 150,000 0.75 (x) = 300,000 x = 300,000 / 0.75 x = 400,000 units Requires sales dollars (400,000 units x $1.0) = $400,000 So $400,000 sales reuired to meet the advertising cots of rash away.
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