Question

F Question 2: Should you reduce the price or increase advertising?

The selling price is $40/unit, variable costs are $30/unit, and fixed costs are $3,000 in total. Sales volume decreased to 200 units because of a recession.
You are considering two options to stimulate sales:
(1) Reduce the price to $38/unit. This will increase sales volume by 20%.
(2) Buy additional advertising for $300 and keep the original price. This will increase sales volume by 20%.

Use the gross approach to decide whether you should do nothing (the status quo), reduce the price, or increase advertising.

	status quo	(1) reduce the price	(2) increase advertising
Volume in units
Revenue	$	$	$
Variable costs	$	$	$
Contribution margin	$	$	$
Fixed costs	$	$	$
Profit*	$	$	$

* enter losses as a negative number: e.g., a loss of $500 should be entered as -500, not as (500) or ($500).

What should you do?

Do nothing

Reduce the price    

Increase advertising

Answer 1

B A 1 2 Volume in units 3 Revenue 4 Less: Variable cost 5 Contribution Margin 6 Less: Fixed Cost 7 Profit ($) Status Quo (1) reduce the price (2) increase advertising 2001 240 240 $ 8,000 $ 9,120 $ 9,600 $ 6,000 $ 7,200 $ 7.200 $ 2,000 $ 1,920 $ 2,400 3,000 $ 3,000 $ 3,300 -1000.00 -1080 -900.00 9 Increase Advertising 10 Because the losses in Status Quo and reduce the price are high, so use the increase advertising. 11

A 1 Volume in units Revenue Less: Variable cost 5 Contribution Margin 6 Less: Fixed Cost 7 Profit ($) 8 Status Quo 200 =40*200 =30*200 2000 3000 -1000 c (1) reduce the price =200*120% =38*240 =30*240 1920 3000 -1080 |(2) increase advertising =200*120% =40*240 =30*240 2400 =3000+300 -900