Dizzylu Productions makes celebrity dolls that are sold through large retail chain stores. Of all the dolls produced in the past 10 years, the greatest disappointment has been the Ethel doll. The poor performance of this doll is reflected in the 2020 income statement as presented:

Sales ($5 per unit) $500,000

Variable CGS (550,000)

Variable selling costs (50,000)

Avoidable direct fixed costs (100,000)

Segment (product) margin $(200,000)

Required:

a. Under the current cost structure, what volume of production would maximize profit on the Ethel doll?

b. The sales manager has suggested the firm double the unit price of the doll. She believes that, if the price increase is accompanied by an increase of $100,000 in advertising, such a price increase would only reduce existing demand by 25%. How would such a change impact the existing segment margin?