Evans Company has current sales of $300000 and variable costs of $180000. The company's fixed costs...

Evans Company has current sales of $300000 and variable costs of $180000. The company's fixed costs equal $100000. The marketing manager is considering a new advertising campaign, which will increase fixed costs by $5000. She anticipates that the campaign will cause sales to increase by 5 Per cent as a result.

Should the company implement the new advertising campaign? What will be the impact on Evans' profit?

Expert Solution

Yes, the company should implement the new advertising campaign.

It will increase Evans' profit by $ 1,000

Working:

Step-1:Calculation of existing net profit

Sales		$ 3,00,000
Variable cost		$ 1,80,000
Contribution margin		$ 1,20,000
Fixed cost		$ 1,00,000

Net Profit		$ 20,000

Working:

Contribution Margin	=	Sales	-	Variable cost
	=	$ 3,00,000	-	$ 1,80,000
	=	$ 1,20,000

Contribution Margin ratio	=	Contribution Margin	/	Sales
	=	$ 1,20,000	/	$ 3,00,000
	=	40%

Step-2:Impact of additional advertisement on net profit

		Existing		Increased		effect
Sales		$ 3,00,000		$ 3,15,000
Variable cost		$ 1,80,000		$ 1,89,000
Contribution margin		$ 1,20,000		$ 1,26,000
Fixed cost		$ 1,00,000		$ 1,05,000

Net Profit		$ 20,000		$ 21,000		$ 1,000

Working;

Increased sales	=	$ 3,00,000	*	1.05	=	$ 3,15,000
Variable cost	=	$ 1,80,000	*	1.05	=	$ 1,89,000

Existing fixed cost		$ 1,00,000
Add advertisement cost		$ 5,000

Increased fixed cost		$ 1,05,000

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