In: Finance
Test Your Understanding: : A company typically sells 100,000 units at $10 per unit. It runs a promotion that discounts each unit by $4 per unit. To promote the discount, the company pays a flat fee of $25,000. The company sells 75,000 additional units in incremental sales. The company tells its marketing team to kill any promotion that has<10% MROI.
Should the company proceed with this promotion and discount?
Why or why not?
Formula | ||
no of units sold in general | 1,00,000 | |
Price per unit | 10 | |
Sales | 10,00,000 | 100,000 *10 |
Promotion | ||
Discount | 4 | |
Discounted price | 6 | 10-4 |
Promotion cost | 25,000 | |
Additional units sold | 75,000 | |
Total sales | 10,50,000 | (10000+75000)*6 |
Incremental sales value gained | 50,000 | 1050000-1000000 |
MROI | 100% | (Incremental sales - promotion cost)/promotion cost |
Since the MROI is >10%, the company should prceed with the promotion and discount.