Question

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 where as rash away also included a compound that eliminated 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 a price reduction  to stimulate sales volume. A volume, price, and cost summery for the products is as 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                          1,000,000                            1,500,000

 

Both Brand Managers included a recommendation to either reduce price by 10 percent or invest an incremental $150,000 in advertising.

B-

How many additional sales dollars must be produced to cover each $1.00 of incremental advertising for Rash-Away? For Red Away?

Answer 1

To cover the 150,000 advertising costs the products have to have a sales volume which is equal to the cost of advertising, we can calculate the required dollars of sales by using the profit equation as follows;

For Rash away:

x is the required units.

Required profit = Selling price (x) - Variable cost (x) - Total fixed cost

                       = Contribution margin per unit (x) - Total fixed cost

150,000          = $0.60 (x) - 150,000

0.60 (x)           = 300,000

x                      = 300,000 / 0.60

x                      = 500,000 units

Requires sales dollars (500,000 units x $2.0) = $1,000,000

So $1,000,000 sales reuired to meet the advertising cots of rash away.

For Red away:

x is the required units.

Required profit = Selling price (x) - Variable cost (x) - Total fixed cost

                       = Contribution margin per unit (x) - Total fixed cost

150,000          = $0.75 (x) - 150,000

0.75 (x)           = 300,000

x                      = 300,000 / 0.75

x                      = 400,000 units

Requires sales dollars (400,000 units x $1.0) = $400,000

So $400,000 sales reuired to meet the advertising cots of rash away.