Suppose you have the following information. Current product price equal $5.00 Cu
ID: 1097326 • Letter: S
Question
Suppose you have the following information.
Current product price equal $5.00
Current sales level equal 45,000 units
The advertising department expects the next $20,000 in ad spend should increase sales by 5,000 units to 50,000 while maintaining the current price of $5.00.
The finance department predicts dropping the price by $1.00 will increase sales by 15,000 to 60,000 units next year.
Which action should you take next year, increase advertising or drop price. Be sure to use economic theory we discuss in this class? (Show work please)
Explanation / Answer
Suppose you have the following information.
Current product price equal $5.00
Current sales level equal 45,000 units
The advertising department expects the next $20,000 in ad
New sale 50,000
The finance department predicts dropping the price by $1.00 New sale = 60,000
Revenue from the sale 45,000*5 =225,000
Advertisement and New Revenue 50,000*5=250,000 (After reducing the cost of ad 250,000 -5,000 = 245,000)
Reduction in the price and New Revenue 60,000*4 = 240,000
Firm is getting more revenue when it goes with ad hence it is better option to go with Ad.
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