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Homework answers / question archive / With an increase in product advertising of $50 million you expect to increase sales by 10,000 units
With an increase in product advertising of $50 million you expect to increase sales by 10,000 units. If unit gross margin is $4,800, will the additional advertising increase product contribution?
The unit gross margin is $4,800.
Therefore, when sales increase by 10,000 units, the change of the level of gross margin will be;
10,000*4,800 = $48 Million.
This increase in gross margin is associated with an increase in advertisement expenses of $50 Million. This is a variable cost.
Now, the production contribution due to an increase in advertisement will be;
The sales revenue - Variable costs
$48,000,000 - $50,000,000
= -$2,000,000
Here, the production contribution is declining.
Therefore, the correct answer is NO.