The group product 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-Away was primarily a cosmetic treatment whereas Rash-Away
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:
contribution $0.60 $0.75
1,000,000 units 1,500,000 units
Both brand managers included a recommendation to either reduce
by 10 percent or invest an incremental $150,000 in
a. What absolute increase in unit sales and dollar sales will be
necessary to recoup the incremental increase in advertising
expenditures for Rash-Away? For Red-Away?
b. How many additional sales dollars must be produced to cover
$1.00 of incremental advertising for Rash-Away? For
c. 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?