The group product manager for ointments at American Therapeutic Corporations was

Question

The group product manager for ointments at American Therapeutic Corporations 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 whereas Rash-Away also included a compound that eliminated the rash.
The price and promotion alternatives recommended for the two products by their respective brand managers included the possibility of using additional promotion or a price reduction to stimulate sales volume. A volume, price, and cost summary for the products follows:

Rash-Away
Unit price: $2.00
Unit Variable Costs: $1.40
Unit contribution: $0.60
Unit Volume: 1,000,000 units

Red-Away
Unit price: $1.00
Unit Variable Costs: $0.25
Unit contribution: $0.75
Unit volume: 1,500,000 units

Both brand managers included a recommendation to either reduce price by 10% or invest an incremental $150,000 in advertising.

a) What absolute increase in unit sales and dollar sales will be necessary to recoup the incremental increase in advertising expenditures for Rash-Away? For Red-Away?

b) How many additional sales dollars must be produced to cover each $1.00 of incremental advertising for Rash-Away? For Red-Away?

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%?

Please guide me by giving a step by step working out about this question.. thank you!

Explanation / Answer

Rash-Away Red-Away Selling price per / unit 2.00 1.00 Variable cost 1.40 0.25 Contribution per unit 0.60 0.75 No. of units 1,000,000 1,500,000 Total contribution 600,000 1,125,000 (a) Advertisement cost 150,000 150,000 Incremental sales /units (Advertisement cost/Contribution per unit) 150,000 / .060 150,000/.75 250,000 units 200,000 units Incremental Dollar sales 250,000 X 2 200,000 X 1 (Units sales X Selling price) $500,000 $200,000 (b) For each $1 increment in advertising cost, the additional sales dollars required will be Rash-Away Red-Away 2.00/0.60 1/0.75 = 3.33 = 1.33 © If the price is reduced by 10% Rash-Away Red-Away Selling price per / unit 1.80 0.90 Variable cost 1.40 0.25 Contribution per unit 0.40 0.65 Total contribution 600,000 1,125,000 Required No. of units necessary to be sold 600,000/.40 1,125,000/.65 (Contribution required/ contribution Per unit) =1,500,000 1,500,000 Sales in dollars 1,500,000 X 1.80 1,500,000 X 0.90 (Units X Selling Price Per unit) = $2,700,000 = $1,350,000

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