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Use the gross approach to decide whether you should do nothing (the status quo), reduce the price, or increase advertising.

Use the gross approach to decide whether you should do nothing (the status quo), reduce the price, or increase advertising.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question 2: Should you reduce the price or increase advertising? The selling price is $50/unit, variable costs are $40/unit, and fixed costs are $3,000 in total. Sales volume decreased to 200 units because of a recession. You are considering two options to stimulate sales: (1) Reduce the price to $48/unit. This will increase sales volume by 20%. (2) Buy additional advertising for $300 and keep the original price. This will increase sales volume by 20%. Use the gross approach to decide whether you should do nothing (the status quo), reduce the price, or increase advertising. (1) reduce the price (2) increase advertising status quo Volume in units Revenue $ $ $ $ $ $ $ $ Profit* $ $ * enter losses as a negative number: e.g., a loss of $500 should be entered as -500, not as (500) or ($500). Variable costs Contribution margin Fixed costs What should you do? O Reduce the price Do nothing O Increase advertising $ $ $ $ $
Transcribed Image Text:Question 2: Should you reduce the price or increase advertising? The selling price is $50/unit, variable costs are $40/unit, and fixed costs are $3,000 in total. Sales volume decreased to 200 units because of a recession. You are considering two options to stimulate sales: (1) Reduce the price to $48/unit. This will increase sales volume by 20%. (2) Buy additional advertising for $300 and keep the original price. This will increase sales volume by 20%. Use the gross approach to decide whether you should do nothing (the status quo), reduce the price, or increase advertising. (1) reduce the price (2) increase advertising status quo Volume in units Revenue $ $ $ $ $ $ $ $ Profit* $ $ * enter losses as a negative number: e.g., a loss of $500 should be entered as -500, not as (500) or ($500). Variable costs Contribution margin Fixed costs What should you do? O Reduce the price Do nothing O Increase advertising $ $ $ $ $
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