Joe Pringle, product manager of Handi-Snacks, is considering offering a case allowance to the trade. He expects sales to be 40,000 cases in the absence of promotion. The case price to the trade is $10 and the contribution margin is 40 percent. He is considering a $1/case allowance. (A case allowance is a discount on the price). He expects sales to increase by 20,000 cases with the promotion. The estimated fixed cost of developing and administering this promotion is $6,000.
(a) Will net contribution increase as a result of this promotion?
(b) At what level of sales will the net income from the promotion equal the net income without the promotion?
(c) On discussion with the sales manager, Joe concludes that an allowance of only $0.50/case will secure additional sales of 12,000 cases. Should he offer a $1/case or a $0.50/case allowance?