Question

Lareem company produces two products. Information on the

two products for the most recent year appears below:

Product A Product B

selling price per bar $5.00 $3.00

variable costs per bar $2.25 $1.70

number of units sold 50,000 units 42,000 units

Fixed costs totaled $108,000.

ABC Company is considering investing in an advertising

campaign that will double the sales volume of Product B.

ABC wants to increase next year's profits by 30% over the

most recent year's profits. Assume the sales of Product A

are expected to decrease by 15% as some customers who are

currently buying Product A will switch to Product B.

Calculate the maximum amount that can be spent on the

advertising campaign.

Answer 1

	Existing plan		Desired Plan		Total
		Product A	Product B	Total	Product A	Product B
A	Selling price	5	3		5	3
B	Variable cost	2.25	1.7		2.25	1.7
C	NO of units sold	50000	42000	(50000-15%)	42500	84000	(42000*2)
D=A-B	Contribution Per unit	2.75	1.3		2.75	1.3
E=C*D	Total Contribution	137500	54600		116875	109200
F	Overall Contribution	(137500+54600)		192100			226075
G	Fixed Cost			108000			108000
H=F-G	Total Profitability			84100			118075

sales voulme of Product B will Double beacuse of Advertisement expenses so here the sales voulme of Product B is (42000*2)=84000.

Sales vouleme of Product A will Decerease by 15% since customers swift from Product A to Product B so in desired plan the sales voulme of Product A is (50000-15%)=42500.

Assume that here their is no increase in sales price and Varible cost

here due to advertisement we need to increase profit by 30% so desired profit is actucal profit +30%

=84100+30%=109330

In desired plan we got profit as 118075

so maximum expenditure we can inccur to maintain the desired profit  is =118075-109330=8745