3 The group product manager for ointments at American Therap

3. The group product manager for ointments at American Therapeutic Corpo- ration was reviewing price and promotion alternatives for two products: Rash-Away and Red-Away. Both products were designed to reduce skin irrita- tion, but Red-Away 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 prod- ucts by their respective brand managers included the possibility of using addi- tional promotion or a price reduction to stimulate sales volume. A volume, price, and cost summary for the two products follows: Unit price Unit variable costs Unit contribution Unit volume Rash-Away $2.00 1.40 $0.60 Red-Away $1.00 0.25 $0.75 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. What absolute increase in unit sales and dollar sales will be necessary to recoup the incremental increasc in advertising expenditures for Rash-Away? For Red-Away? a. b. How many additional sales dollars must be produced to cover each $1.00 of incremental advertising for Rash-Away? For Red-Away? What absolute increase in unit 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? c.

Solution

Answer-3(a) Rash Away Red-Away
Contruition per unit ( in $) 0.6 0.75
Addition fixed cost incurred on advertisement ( in $) 150000 150000
No. of Increment unit to be sold to recover additional fixed cost ( in Unit) 250000 200000
( Fixed Cost/   Per unit Contribution
Price per Unit 2 1
Total revenue by incremental sales 500000 200000
Answer-3(b) Rash Away Red-Away
Contruition per unit ( in $) 0.6 0.75
Addition fixed cost incurred on advertisement ( in $) 150000 150000
No. of Increment unit to be sold to recover additional fixed cost ( in Unit) 250000 200000
( Fixed Cost/   Per unit Contribution
Price per Unit 2 1
Total revenue by incremental sales 500000 200000
$ sale required to recover $1 incremental advertising cost   ( in $)                   3.33 1
Answer-3(C) Rash Away Red-Away
Contruition/unit ( in $) 0.6 0.75
Variable cost/Unit ( in $) 1.4 0.25
Existing Sale price/unit ( in $) 2 1
Revised price ( in $) 1.8 0.9
Revised contribution/unit ( in $) 0.4 0.65
Existing Sales Volume ( in Unit) 1000000 1500000
Total contribution on existing Sales and existing price ( in $) 600000 1125000
Total contribution on existing Sales on Revised price ( in $) 400000 975000
Reduction in contribution ( in $) 200000 150000
Incremental sales required ( in Unit) 500000 230769.231
( Reduction in Contribution/Contribution Per Unit)
Incremental sales required ( in $) 900000 207692.308

Answer-3(a)		Rash Away		Red-Away
	Contruition per unit ( in $)	0.6		0.75
	Addition fixed cost incurred on advertisement ( in $)	150000		150000
	No. of Increment unit to be sold to recover additional fixed cost ( in Unit)	250000		200000
	( Fixed Cost/   Per unit Contribution
	Price per Unit	2		1
	Total revenue by incremental sales	500000		200000
Answer-3(b)		Rash Away		Red-Away
	Contruition per unit ( in $)	0.6		0.75
	Addition fixed cost incurred on advertisement ( in $)	150000		150000
	No. of Increment unit to be sold to recover additional fixed cost ( in Unit)	250000		200000
	( Fixed Cost/   Per unit Contribution
	Price per Unit	2		1
	Total revenue by incremental sales	500000		200000
	$ sale required to recover $1 incremental advertising cost   ( in $)	3.33		1
Answer-3(C)		Rash Away		Red-Away
	Contruition/unit ( in $)	0.6		0.75
	Variable cost/Unit ( in $)	1.4		0.25
	Existing Sale price/unit ( in $)	2		1
	Revised price ( in $)	1.8		0.9
	Revised contribution/unit ( in $)	0.4		0.65
	Existing Sales Volume ( in Unit)	1000000		1500000
	Total contribution on existing Sales and existing price ( in $)	600000		1125000
	Total contribution on existing Sales on Revised price ( in $)	400000		975000
	Reduction in contribution ( in $)	200000		150000
	Incremental sales required ( in Unit)	500000		230769.231
	( Reduction in Contribution/Contribution Per Unit)
	Incremental sales required ( in $)	900000		207692.308