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# Sales Strategy: Selecting the Better Strategy

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Gobi Inc. has sales of \$40,000,000. The contribution margin is 40% and the fixed costs are \$3,000,000. The variable cost per unit is \$12. The company is considering two different strategies for increasing their profits:

1) Spend \$2,000,000 in advertising: the results is expected to increase the company's sales by 25%
2) Reduce the price by 20%; the price-demand elasticity is -3.0

Which of the two strategies will generate the highest overall profits?

##### Solution Summary

This solution determines which strategy gives higher profits. Formula and calculations are provided and answers are explained.

##### Solution Preview

Current Sales=40,000,000
Contribution margin ratio=CMR=40%
Contribution margin (\$)=CM=Sales*CMR=40000000*40%=\$16,000,000
Fixed Costs= 3,000,000
Operating profit=CM- fixed Cost=16,000,000-3,000,000=\$13,000,000

1. Spend \$2,000,000 in advertising; results expected to increase sales by 25%

Expected Sales=40000000*(1+25%)=\$50,000,000
Contribution margin ratio=CMR=40%
Contribution margin ...

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###### Education
• BEng (Hons) , Birla Institute of Technology and Science, India
• MSc (Hons) , Birla Institute of Technology and Science, India
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