Your company’s sales are 50,000 units. The unit variable cost is $12. Your markup percent on sales is 40% and your fixed costs are $100,000.
1. What is your profit / loss?
You are thinking of increasing your advertising by $200,000. Based on previous data, you know that for every dollar increase in advertising your sales will go up by $2.
2. Should they go for it or not?
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To answer these questions, we need to perform some calculations. Let's break it down step by step:
1. Calculating Profit/Loss:
Profit/Loss = (Sales - Total Costs)
Sales = 50,000 units
Unit Variable Cost = $12
Markup Percent on Sales = 40%
Fixed Costs = $100,000
First, we need to calculate the revenue from sales:
Revenue = Sales * (1 + Markup Percent)
Revenue = 50,000 units * (1 + 40%)
Revenue = 50,000 units * 1.40 = 70,000 units
Next, we'll calculate the Total Variable Costs:
Total Variable Costs = Unit Variable Cost * Sales
Total Variable Costs = $12 * 50,000 units
Now, we can calculate the Total Costs:
Total Costs = Fixed Costs + Total Variable Costs
Total Costs = $100,000 + (Unit Variable Cost * Sales)
Finally, we can calculate the Profit/Loss:
Profit/Loss = Revenue - Total Costs
2. Assessing the impact of increased advertising:
To determine the impact of increasing advertising, we need to consider the relationship between advertising expenditure and increased sales. In this case, for every $1 increase in advertising, sales increase by $2.
Suppose we increase advertising expenditure by $200,000:
Increased Sales = $2 * ($200,000 increase in advertising)
Increased Sales = $400,000
Now, we can calculate the New Revenue:
New Revenue = Sales * (1 + Markup Percent)
New Revenue = (50,000 units + Increased Sales) * (1 + 40%)
Next, we calculate the New Total Variable Costs:
New Total Variable Costs = Unit Variable Cost * (Sales + Increased Sales)
Lastly, we can determine the New Total Costs and New Profit/Loss using the same methods mentioned earlier.
Once we have these calculations, we can determine whether the increase in advertising is worth it by comparing the New Profit/Loss to the original Profit/Loss.