Smith Corp. has determined that its contribution margin, (P - MC)/P, is 40%. A recent market research study found the following relationship between adverting outlays and sales revenue.
|
Advertising Outlays
|
Gross Revenues from Sales
|
|
$500,000
|
$4,000,000
|
|
$600,000
|
$4,500,000
|
|
$700,000
|
$4,900,000
|
|
$800,000
|
$5,200,000
|
|
$900,000
|
$5,420,000
|
|
$1,000,000
|
$5,600,000
|
a. What is the profit maximizing level of advertising? Explain.