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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?

    © BrainMass Inc. brainmass.com December 16, 2022, 8:58 am ad1c9bdddf

    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 ...

    Solution Summary

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