Ben & Harry Co A Management Thinks That a 5 Percent Reduction in the Following

Essay

Ben & Harry Co.sold 100,000 units last year with the following results:
$$\begin{array} { l r } \text { Sales revenue } & \$ 400,000 \\\text { Variable costs } & 160,000 \\\text { Contribution margin } & \$ 240,000 \\\text { Fixed costs } & 100,000 \\\text { Operating income } & \$ 140,000 \\\end{array}$$
a. Management thinks that a 5 percent reduction in the unit sales price and a $31,000 increase in fixed advertising costs will create a 30 percent increase in unit sales. Assess this proposal and make a recommendation on what action should be taken.
b. Assume that the marketing manager thinks that the unit sales price should not be changed. Instead, he recommends a $0.40 per unit increase in sales commissions coupled with some increase in advertising to generate the 30 percent increase in unit sales and a 20 percent increase in operating income. Assess this proposal and determine the maximum amount of money that can be spent on advertising if the targeted profit is to be achieved.