Santos company is starting its advertising campaign for next year and has prepared the subsequent budget data based on a zero advertising expenditure:
Normal plant capacity 200,000 units
Sales 150,000 units
Selling price 25 per unit
Variable manufacturing costs 15 per unit
Fixed manufacturing costs 800,000
Fixed selling costs 700,000
An advertising agency claims that an aggressive advertising campaign would enable Santos to increase its units sales by 20 percent. Evaluate the maximum amount that Santos Company can pay for advertising and have an operating profit of 200,000 next year? Show solution.