2. The group product manager for ointments at American Therapeutic Corporation w

Question

2. 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 as 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 two products 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 1,250,000 units 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%?

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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