With an increase in product advertising of $50 million you expect to increase sales by 10,000 units

Marketing Dec 22, 2020

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?

Expert Solution

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.

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