Question

Madrigal Theater Company is considering an advertising campaign that is expected to increase annual sales by 15,000 tickets. Assume that the ticket selling price is $25. Ignoring the cost of the advertising campaign, what is the expected increase in profit associated with the advertising campaign

Answer 1

$280,000

Step-by-step explanation:

You were missing the variable cost per ticket sold which is $5. To determine how much the marketing campaign will increase profits, we must multiply the contribution margin per ticket time the additional tickets sold:

contribution margin per ticket = sales price - variable cost per ticket = $25 - $5 = $20

total increase in profits = 14,000 tickets x $20 per ticket = $280,000

total revenues would increase by: 14,000 tickets x $25 per ticket = $350,000, but $70,000 would be used to pay variable costs.