Problem: 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 also included a compound that eliminated a 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:
Rash away Red away
unit price $2 $1
unit variable costs $1.40 $0.25
unit contribution $0.60 $0.75
unit volume 1,000,000 units 1,500,000 units
Both brand managers included a recommendation to either reduce price by 10% or invest an incremental $150,000 in advertising.
Q1. 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?
Q2. How many additional sales dollars must be produced to cover each $1.00 of incremental advertising for Rash Away? For Red Away?