14. This problem emphasizes the differences between the fullcost approach and contribution-margin approach to marketing cost analysis.

Tapco, Inc., currently sells two products. Sales commissions and unit costs vary with the quantity of each product sold.

With the full-cost approach, Tapco’s administrative and advertising costs are allocated to each product based on its share of total sales dollars. Details of Tapco’s costs and other data are given in the spreadsheet. The first column shows a cost analysis based on the full-cost approach. The second column shows an analysis based on the contribution-margin approach.

a. If the number of Product A units sold were to increase by 1,000 units, what would happen to the allocated administrative expense for Product A? How would the change in sales of Product A affect the allocated administrative expense for Product B? Briefly discuss why the changes you observe might cause conflict between the product managers of the two different products.

b. What would happen to total profits if Tapco stopped selling Product A but continued to sell 4,000 units of Product B?

What happens to total profits if the firm stops selling Product B but continues to sell 5,000 units of Product A?

(Hint: To stop selling a product means that the quantity sold would be zero.)

c. If the firm dropped Product B and increased the price of Product A by $2.00, what quantity of Product A would it have to sell to earn a total profit as large as it was originally earning with both products? (Hint: Change values in the spreadsheet to reflect the changes the firm is considering, and then use the What If analysis to vary the quantity of Product A sold and display what happens to total profit.)