Flintrock Fixtures is a small partnership that produces and markets a variety of kitchen and bathroom fixtures in ceramics, metal, and marble. The market for these products in Flintrock’s area is not highly competitive, since the rival firms tend to compete in separate market segments of the fixtures market. Over the past year, one of the major partners, Charles Flint, has been experimenting with advertising and promotional levels in order to ascertain the impact of this variable on sales. Regressing monthly sales revenue against monthly advertising and promotional expenditures, Mr. Flint has obtained the following regression equation: TR = 110,482.5 + 2318.6/1 — 103.2A2, where TR represents sales revenue in dollars and A represents advertising and promotional expenditures in thousands of dollars. This equation was derived from data ranging from $1,000 to $8,500 spent per month on advertising and promotion. (R2 = 0.99, significant at the 1 percent level.) The present level of advertising and promotional expenditure is $6,000 per month, and Mr. Flint, who wishes to maximize sales revenue, wishes to increase this expenditure to $7,500 per month, which is the maximum that Rocky Spinelli, the other major partner, will agree to.

A minor partner in the enterprise, Peter Pebble, is concerned with the short-term profits of the enterprise. Fie argues that given the firm’s pricing policy of marking up average variable costs by 100 percent, monthly profits would be increased significantly by reducing advertising and promotional expenditures. Mr. Pebble argues that a reduction of at least $2,000 per month would augment profits considerably.

Another minor partner, John Stone, argues that the longer-term profitability of the enter¬ prise is the appropriate objective to pursue and that he supports Mr. Flint.

(a) What level of expenditure on advertising and promotion would maximize monthly sales revenue, given no limit on this level? How confident are you about the accuracy of this prediction? Explain.

(b) What level of expenditure on advertising and promotion would maximize monthly profits? Explain.

(c) Make an argument to support Mr. Stone’s position.

(d) Presuming Mr. Stone to be correct in his reasoning and Mr. Pebble to be outvoted, what do you suggest Flintrock do?