The group manager for ointments at American Therapeutic Corporation was reviewing price and promotion alternatives for two products: Rash-Away and Red-Away. Both products were designed to reduce skin irritation, but red-way was primarily a cosmetic treatment whereas Rash-Away also included a compound that eliminated the rash.
The price and promotion alternatives recommended for the two products by their respective brand managers included the possibility of using additional promotion or a price reduction to stimulate sales volume. A volume, price, and cost summary for the two products follows:
Rash-Away Red-Away
Unit price $2.00 $1.00
Unit variable 1.40 0.25
Unit contribution $0.60 $0.75
Unit volume 1,000,000 units 1,500,000 units
Both brand managers included a recommendation to either reduce price by 10 percent or invest an incremental $150,000 in advertising.
A. What absolute increase in unit sales and dollar sales will be necessary to recoup the incremental increase in advertising expenditures for Rash-Away and Red-Away and how many additional sales dollars must be produced to cover each $1.00 of incremental advertising for rash-away and red-away. And what absolute increase in units sales and dollar sales will be necessary to maintain the level of total contribution dollars if the price of each product is reduced by 10 percent?