The group product manager for ointments at American Therapeutic Corporation was
ID: 2357851 • 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.
C-
What absolute increase in unit sales and dollar sales will be necessary to maintain the level of total contribution dollars if the price of each product is reduced by 10% ?
Explanation / Answer
Unit price – unit variable costs = contribution margin per unit
For Rash away, this is 0.60. For Red away, this is 0.75.
If their prices are reduced by 10%,
Then 1.80 – 1.40 = .40 is the new contribution margin for Rash away, and 0.90 – 0.25 = 0.65 is the new contribution margin for Red away.
For rash away 0.60/0.40 = 1.5 or 150%, so they will have to increase sales by 150%. If the previous sales had been 1,000,000 units, then the new sales amount will have to be 1,000,000*1.5 = 1,500,000 units or $2,700,000. So the increase is 500,000 units or $700,000.
For Red away, 0.75/0.65 = 1.153846…, so they will have to increase sales by 115.3846…%, If the previous sales had been 1,500,000 units, the new sales amount will have to be 1,500,000*1.153… = 1,730,770 (rounded up) or $1,557,693. So the increase is 230,770 or $57,693
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