Question

A company is currently selling 10,000 units of a product. The selling price is 40 per unit and the CM is27 per unit. The company thinks spending 50,000 on advertising will increase sales by 750 units per month and allow them to increase the selling price to45 per unit. If this is correct, what should the company do?

1) Continue selling 10,000 units at $40 per unit
2) Increase advertising spending to $50,000 and increase selling price to $45 per unit
3) Increase advertising spending to $50,000 and keep selling price at $40 per unit
4) Increase advertising spending to $50,000 and decrease selling price to $35 per unit

Answer 1

To determine the best course of action, we need to compare the profits under different scenarios. By analyzing each option, we find that increasing advertising spending to $50,000 and increasing the selling price to $45 per unit would result in the highest profit of $156,500.

Step-by-step explanation:

To determine what the company should do, we need to compare the profits under different scenarios. Let's analyze each option:

1. Continue selling 10,000 units at $40 per unit:
   • Total revenue = 10,000 units * $40 = $400,000
   • Total cost = 10,000 units * $27 = $270,000
   • Profit = Total revenue - Total cost = $400,000 - $270,000 = $130,000
2. Increase advertising spending to $50,000 and increase selling price to $45 per unit:
   • New price per unit = $45
   • New units sold = 10,000 units + 750 units = 10,750 units
   • Total revenue = 10,750 units * $45 = $483,750
   • Total cost = 10,750 units * $27 + $50,000 = $327,250
   • Profit = Total revenue - Total cost = $483,750 - $327,250 = $156,500
3. Increase advertising spending to $50,000 and keep selling price at $40 per unit:
   • Total revenue = 10,000 units * $40 = $400,000
   • Total cost = 10,000 units * $27 + $50,000 = $320,000
   • Profit = Total revenue - Total cost = $400,000 - $320,000 = $80,000
4. Increase advertising spending to $50,000 and decrease selling price to $35 per unit:
   • New price per unit = $35
   • New units sold = 10,000 units + 750 units = 10,750 units
   • Total revenue = 10,750 units * $35 = $376,250
   • Total cost = 10,750 units * $27 + $50,000 = $327,250
   • Profit = Total revenue - Total cost = $376,250 - $327,250 = $49,000

The option that results in the highest profit is option 2) Increase advertising spending to $50,000 and increase selling price to $45 per unit. This option would generate a profit of $156,500.