Forsman, Inc. has sales of $10,000,000. The contribution margin is 40% and the fixed costs are $1,000,000. The price per unit is $10. The company is considering two different strategies for increasing their profits:
(a) Spend $800,000 in advertising. The result is expected to increase the company’s sales by 50%.
(b) Reduce the price by 20%. The price-demand elasticity is 2.0.
Which of the two strategies will generate the highest profits? Show all calculations!