Problem: Gobi Inc. has sales of $40,000,000. The contribution margin is 40% and the fixed costs are $3,000,000. The variable cost per unit is $12. The company is considering two different strategies for increasing their profits:
1) Spend $2,000,000 in advertising: the results is expected to increase the company's sales by 25%
2) Reduce the price by 20%; the price-demand elasticity is -3.0
Which of the two strategies will generate the highest overall profits?