Question

The group product manager for ointments at American Therapeutic Corporation was reviewing price and promotion alternatives for two products: Rash Away and RedAway. both Products were designed to reduce skin irritation, but red away was primarily a cosmetic treatment where as rash away also included a compound thateliminated the rash.

The price and promotion alternatives recommended for the two products by their respective brand mangers included the possibility of using additional promotion or aprice reductionto stimulate sales volume. A volume, price, and cost summery for the products is as follows.

Rash AwayRed Away

UnitPrice$2.00$1.00

Unit Variable Costs$1.40$0.25

Unit Contribution$0.60$0.75

Unit Volume1,000,0001,500,000

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 dollars sales will be necessary to recoup the incremental increase in advertising expenditures for Rash Away? For RedAway"

Answer 1

Computing the absolute increase in Unit sales and dollar sales to recoup the incremental increase in the advertising expenditure for Rash Away andRed-Away.To determine the increase in Unit sales and dollar sales, we have to compute the Contribution margin ratio for the two products.For Rash-Away:Contribution margin = (Selling price per unit- Variablecostper unit) / SP per unit= ($2.00 - $1.40) / $2.00= $0.6 / $2.0= 0.30 or 30%Absolute increase in Unit sales for Rash-Away is calculated by dividing the advertising expense by contribution margin per unit.Increase in Unit sales = $150,000 / $0.6= 250,000 unitsAbsolute increase inDollar sales for Rash-Away is calculated by dividing the advertising expense by contribution margin ratio.Increase in Dollar sales = $150,000 / 0.30= $500,000For Red-Away:Contribution margin = (Selling price per unit- Variablecost perunit) / SP per unit= ($1.00 - $0.25) / $1.00= $0.75 / $1.0= 0.75 or 75%Absolute increase in Unit sales for Red-Away is calculated by dividing the advertising expense by contribution margin per unit.Increase in Unit sales = $150,000 / $0.75= 200,000 unitsAbsolute increase inDollar sales for Red-Away is calculated by dividing the advertising expense by contribution margin ratio.Increase in Dollar sales = $150,000 / 0.75= $200,000