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

Question

3. 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 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 two products follows: Unit price Unit variable costs Unit contribution Unit volume Rash-Away $2.00 1.40 S0.60 1,000,000 units Red-Away $1.00 0.25 $0.75 1,500.000 units Both brand managers included a recommendation to either reduce price by 10 percent 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 S1.00 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 percent?

Explanation / Answer

a. Rash - Away :

Absolute increase in unit sales necessary to recoup increase in advertising = Proposed Increase in Advertising Expense / Unit Contribution Margin = $ 150,000 / 0.60 = 250,000 units.

Absolute increase in dollar sales = $ 250,000 x $ 2.00 = $ 500,000.

Red-Away :

Absolute increase in unit sales necessary to recoup increase in advertising expense = $ 150,000 / $ 0.75 = 200,000 units.

Absolute increase in dollar sales to recoup increase in advertising expense = $ 200,000 x $ 1.00 = $ 200,000.

b. Additional sales dollars per $ 1 of incremental advertising for Rash-Away = $ 500,000 / $ 150,000 = $ 3.33.

Additional sales dollars per $ 1 of incremental advertising for Red - Away = $ 200,000 / $ 150,000 = $ 1.33.

c. Rash-Away:

Current total contribution dollars = 1,000,000 units x $ 0.60 = $ 600,000.

Let the unit sales required to maintain the contribution margin dollars be Q.

Q ( 1.80 - 1.40) = $ 600,000.

Q = $ 1,500,000.

Absolute increase in unit sales = 500,000.

Absolute increase in dollar sales = 1,500,000 x $ 1.80 - 1,000,000 x $ 2 = $ 700,000.

Red-Away:

Current total contribution dollars = 1,500,000 x $ 0.75 = $ 1,125,000.

Let the unit sales required to maintain the contribution magin dollars be Q.

Q x $ ( 0.90 - 0.25 ) = $ 1,125,000.

Q = 1,730,769 units

Absolute increase in unit sales = 1,730,769 units - 1,500,000 units = 230,769 units.

Absolute increase in dollar sales = 1,730,769 units x $ 0.90 - 1,500,000 units x $ 1.00 = $ 1,557,692 - $ 1,500,000 = $ 57,692.

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