Question 3: Smith Inc. manufactures and sells fan belts. The selling price for these fan belts is $7.00, which is what Smiths competitors charge, as the fan belt is a commodity. Facts for Smith are as follows:
• Smith desires a 12 percent return on its total assets which are $3,000,000.
• Smith has a current sales volume of 500,000 units.
• Variable costs are $4.50 per unit, $3.00 for manufacturing and $1.50 for marketing and administrative costs.
• Fixed costs are $950,000.
Required:
a) Can Smith achieve its desired profit?
b) Suppose that Smith follows a strategy of one of its competitors which is to spend $200,000 on advertising so that there is more brand awareness. This would permit them to raise the selling price to $9 but their sales volume would decrease to 425,000 units. Will Smith achieve its desired profit?