The price and prmotion alternatives recommended for the two products by their re

Question

The price and prmotion 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 as follows: Unit Price $2.00-$1.00, Unit variable costs 1.40-0.25, Unit contribution $0.60-$0.75, Unit volume,1,000,000 units-1,500,000 units. Both brand managers included a recommendation to eiher reduce price by 10 percent or invest an incremental $150,000 in advertising. What absolut increase in nit sales and dollar sales will be necessary to recoup the incremental increase in advertising expenditures for Rash-Away and Red-Away, how many additional sales dollars must be produced to cover each $1.00 of inremental advertising and the total contribution dollars if the price of product is reduced by 10 percent?

Explanation / Answer

Rash-Away :
SP pu 2.00
Less Var cost pu 1.40
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COnt pu = 0.60
Unit Vol 1,000,000
SO Total COnt = 1,000,000*0.60 = $600,000
Less Addl Advtg $150,000
------------------------------
Net Income 450,000 .................(A1)

If price reduced by 10%,
SP pu 0.90*2.00 = 1.80
Less Var cost pu 1.40
-------------------------------
COnt pu = 0.40
Unit Vol 1,000,000
SO Total COnt = 1,000,000*0.40 = $400,000 ........(A2)

Red-Away :
SP pu 1.00
Less Var cost pu 0.25
-------------------------------
COnt pu = 0.75
Unit Vol 1,500,000
SO Total COnt = 1,500,000*0.75 = $1,125,000
Less Addl Advtg $150,000
------------------------------
Net Income 975,000 .................(B1)

If price reduced by 10%,
SP pu 0.90*1.00=0.90
Less Var cost pu 0.25
-------------------------------
COnt pu = 0.65
Unit Vol 1,500,000
SO Total COnt = 1,500,000*0.65 = $975,000 ,......(B2)

1. What absolut increase in unit sales and dollar sales will be necessary to recoup the incremental increase in advertising expenditures for Rash-Away and Red-Away,
Rash-Away :
A1. For Inc in Advtg, Cont pu 0.60.
So Addl units reqd = Inc in Avtg cost/COt pu = 150,000/0.60 = 250,000 units
SO addl Sales $$$ reqd = 250,000*$2 = $500,000

A2: Redcution in Sales price :
Cont pu = 0.40. DIff in COnt = 600,000-400,000 = 200,000
SO Addl units reqd = 200,000/0.40 = 500,000 units
SO Addl Sales reqd = 500,000*$1.80 = $900,000

Red-Away :
B1. For Inc in Advtg, Cont pu 0.75
So Addl units reqd = Inc in Avtg cost/COt pu = 150,000/0.75 = 200,000 units
SO addl Sales $$$ reqd = 200,000*$1 = $200,000

B2: Redcution in Sales price :
Cont pu = 0.65. DIff in COnt = 11250,000-975,000 = 150,000
SO Addl units reqd = 150,000/0.65 = 230,769 units
SO Addl Sales reqd = 230,769*$0.9 = $207,692

how many additional sales dollars must be produced to cover each $1.00 of inremental advertising and the total contribution dollars if the price of product is reduced by 10 percent?

Pl see the above colred nos for answer

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