Concord Microwave Systems, Inc., manufactures and markets radar detectors. Their original product, the Diplomat, had been the industry standard of excellence for several years, until their new miniaturized version, the Ambassador, was introduced three years ago. This smaller version now sets the standards that the other manufacturers try to meet. Sales have been strong trom its introduction, but the management of Concord is considering whether or not the adver¬ tising budget should be increased. They currently spend only $180,000 per annum, mostly in auto magazines, on advertising and promotion. They prefer to keep a relatively low profile rather than stir up opposition to radar detectors. Nonetheless, they feel that they could increase their advertising budget by about a third without raising significant opposition to their product.

Based on monthly sales and advertising data collected over the past two years Concord’s marketing research department has estimated the sales-advertising function for its miniature radar detector to be Q = 49,973.4 + 16.11M - 0.0115/1’, where Q represents units of quan- tity demanded, and A represents thousands of dollars spent on advertising. The price has been $295 ever since the introduction of the Ambassador model, and its average variable cost of production has stabilized at $200 per unit regardless of volume produced, within reasonable units. Concord s total fixed costs amount to $2.5 million per annum, excluding advertising.

(a) Calculate the current output, total revenue, and total profit levels, based on the sales-adver- tising function.

(b) What is the profit-maximizing level of advertising?

(c) Calculate the output, revenue, and profit levels that Concord might expect if advertising expenditure was adjusted to the profit-maximizing level.

(d) State any assumptions and qualifications that underlie your analysis.