The ABC Company sells two products, S and Y. The following information is availa

Question

The ABC Company sells two products, S and Y. The following information is available: S Y Selling price $6.00 $4.00 Variable costunit. 3.50 2.00 Anticipated sales (units) 30,000 70,000
Fixed costs amount to $80,000
Management believes that it can increase sales by $50,000 of either product through a new advertising program. Capacity exists to increase production of either product. Should the advertising campaign be targeted to Product S or Product Y? Explain why? Provide financial support for your explanation The ABC Company sells two products, S and Y. The following information is available: S Y Selling price $6.00 $4.00 Variable costunit. 3.50 2.00 Anticipated sales (units) 30,000 70,000
Fixed costs amount to $80,000
Management believes that it can increase sales by $50,000 of either product through a new advertising program. Capacity exists to increase production of either product. Should the advertising campaign be targeted to Product S or Product Y? Explain why? Provide financial support for your explanation S Y Selling price $6.00 $4.00 Variable costunit. 3.50 2.00 Anticipated sales (units) 30,000 70,000
Fixed costs amount to $80,000
Management believes that it can increase sales by $50,000 of either product through a new advertising program. Capacity exists to increase production of either product. Should the advertising campaign be targeted to Product S or Product Y? Explain why? Provide financial support for your explanation

Explanation / Answer

Let’s see the impact of additional sales $50000 on the profitability of each product;

S

Y

Selling price per unit

$6

$4

Less: Variable cost per unit

($3.50)

($2)

Contribution margin

$2.5

$2

Contribution margin ratio (C / S)

41.67%

50%

So on the basis of contribution margin percentage, it is clear that product Y have higher contribution margin rate hence advertising campaign should be targeted to Product Y because it will result into higher net income.

Apart from this we can check it with the help of below calculations;

S

Y

Selling price per unit

$6

$4

Number of anticipated units sold

30000

70000

Total sales

$180000

$280000

Additional sales

$50000

$50000

Total sales

$230000

$330000

Contribution margin ratio

41.67%

50%

Total contribution margin (Total sales * CM ratio)

$95841

$165000

Thus it is clear that total contribution margin after including possible sales is higher in case of product Y. Thus advertising campaign should be targeted to Product Y because it will result into higher net income.

S

Y

Selling price per unit

$6

$4

Less: Variable cost per unit

($3.50)

($2)

Contribution margin

$2.5

$2

Contribution margin ratio (C / S)

41.67%

50%

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