Forsman, Inc. has sales of 10,000,000. The contribution margin is 40% and the fixed costs are 1,000,000. The price per unit is 10. The company is considering two different

# Forsman, Inc. has sales of 10,000,000. The contribution margin is 40% and the fixed costs are 1,000,000. The price per unit is 10. The company is considering two different

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Question 3

Forsman, Inc. has sales of 10,000,000. The contribution margin is 40% and the fixed costs are 1,000,000. The price per unit is 10. The company is considering two different strategies for increasing their profits:

(a) Spend 800,000 in advertising. The result is expected to increase the company's sales by 50%.

(b) Reduce the price by 20%. The price-demand elasticity is 2.0.

Which of the two strategies will generate the highest profits?

Show all calculations!

Solution 3:

Option A: Spend 800,000 in advertising:

Total Sales

10,000000 (50% of 10,000,000)

15,000,000

Contribution Margin

40%

6,000,000

Less: Fixed Cost

1,000,000

800,000

Net Profit

4,200,000

Option B: Reducing Price by 20%:

Total Sales

1,400,000* X

11,200,000...

Forsman, Inc
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