The group product manager for ointments at American Therapeutic Corporation was reviewing price and promotion alternatives for two products: Rash-Away and Red-Away. Both products were designed to reduce skin irritation, but Red-Away was primarily a cosmetic treatment whereas Rash-Away also included a compound that eliminated the rash.

The price and promotion alternatives recommended for the two products by their respective brand managers included the possibility of using additional promotion or a price reduction to stimulate sales volume. A volume, price, and cost summary for the two products follows:

Rash-Away Red-Away
Unit price $2.00 $1.00
Unit variable cost $1.40 $0.25
Unit contribution $0.60 $0.75
Unit volume 1,000,000 1,500,000

Both brand managers included a recommendation to either reduce price by 10 percent or invest and additional $150,000 in advertising.

What absolute increase in unit sales and dollar sales will be necessary to maintain the level of total contribution dollars if the price of each product is reduced by 10%?

Solution Summary
Word file contains calculations of absolute increase in unit sales and dollar sales necessary to maintain the level of total contribution dollars if the price of each product is reduced by 10%.

500

25

To calculate the absolute increase in unit sales and dollar sales necessary to maintain the level of total contribution dollars if the price of each product is reduced by 10%, we need to follow these steps:

Step 1: Calculate the current total contribution dollars for each product.
- Rash-Away: Unit contribution x Unit volume = $0.60 x 1,000,000 = $600,000
- Red-Away: Unit contribution x Unit volume = $0.75 x 1,500,000 = $1,125,000

Step 2: Calculate the new unit sales required to maintain the same total contribution dollars after the price reduction.
- For Rash-Away:
- New unit price = $2.00 - (10% of $2.00) = $2.00 - $0.20 = $1.80
- New unit contribution = $1.80 - $1.40 (unit variable cost) = $0.40
- New unit sales required = Total contribution dollars / New unit contribution = $600,000 / $0.40 = 1,500,000 units

- For Red-Away:
- New unit price = $1.00 - (10% of $1.00) = $1.00 - $0.10 = $0.90
- New unit contribution = $0.90 - $0.25 (unit variable cost) = $0.65
- New unit sales required = Total contribution dollars / New unit contribution = $1,125,000 / $0.65 = 1,730,769 units

Step 3: Calculate the absolute increase in unit sales for each product.
- For Rash-Away: New unit sales required - Current unit volume = 1,500,000 - 1,000,000 = 500,000 units
- For Red-Away: New unit sales required - Current unit volume = 1,730,769 - 1,500,000 = 230,769 units

Step 4: Calculate the absolute increase in dollar sales for each product.
- For Rash-Away: Absolute increase in unit sales x Unit price = 500,000 x $1.80 = $900,000
- For Red-Away: Absolute increase in unit sales x Unit price = 230,769 x $0.90 = $207,692.10

Therefore, the absolute increase in unit sales necessary to maintain the level of total contribution dollars if the price of each product is reduced by 10% is 500,000 units for Rash-Away and 230,769 units for Red-Away. The absolute increase in dollar sales necessary is $900,000 for Rash-Away and $207,692.10 for Red-Away.

To calculate the absolute increase in unit sales and dollar sales necessary to maintain the level of total contribution dollars if the price of each product is reduced by 10%, we need to consider the new unit contribution, the change in unit price, and the initial unit volume.

Let's first calculate the new unit contribution after the price reduction:

For Rash-Away:
New unit contribution = Unit price - Unit variable cost
= $2.00 - $1.40
= $0.60

For Red-Away:
New unit contribution = Unit price - Unit variable cost
= $1.00 - $0.25
= $0.75

Now, let's calculate the change in unit sales for each product:

For Rash-Away:
Change in unit sales = (New unit contribution - Initial unit contribution) / New unit contribution
= ($0.60 - $0.60) / $0.60
= 0

For Red-Away:
Change in unit sales = (New unit contribution - Initial unit contribution) / New unit contribution
= ($0.75 - $0.75) / $0.75
= 0

Since the change in unit sales for both products is 0, it means that there is no increase in unit sales necessary.

To calculate the absolute increase in dollar sales, we need to multiply the change in unit sales by the initial unit volume:

For Rash-Away:
Absolute increase in dollar sales = Change in unit sales (Rash-Away) * Initial unit volume (Rash-Away)
= 0 * 1,000,000
= 0

For Red-Away:
Absolute increase in dollar sales = Change in unit sales (Red-Away) * Initial unit volume (Red-Away)
= 0 * 1,500,000
= 0

Therefore, no absolute increase in dollar sales is necessary to maintain the level of total contribution dollars if the price of each product is reduced by 10%.