1. 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 design 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 costs $1.40 0.25
• Unit Contribution $0.60 $0.75
• Unit volume 1,000,000 units 1,500,000 units

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

1. What absolute increase in unit sales and dollar sales will be necessary to recoup the incremental increase in advertising expenditures for Rash-Away? For Red-Away?
2. How many additional sales dollars must be produced to cover each $1.0 of incremental advertising for Rash-Away? For Red-Away? (assume contribution margin is stable)
3. 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%?

2. After spending $300,000 for research and development, chemists at Diversified Citrus Industries have developed a new breakfast drink. The drink, call Zap, will provide the consumer with twice the amount of vitamin C, currently available in breakfast drinks. Zap will be packaged in an 8-ounce can and will be introduced to the breakfast drink market, which is estimated to be equivalent to 21 million 8-ounce cans nationally. Management has decided to use newspapers to promote Zap in the introductory year and distribute Zap in major metropolitan areas that account for 65 percent of U.S. breakfast drink volume. Newspaper advertising will carry a coupon that will entitle the consumer to receive $0.20 off the price of the first can purchased. The retailer will receive the regular margin and be reimbursed for redeemed coupons by Diversified Citrus Industries. Past experience indicates that for every five cans sold during the introductory year, one coupon will be returned. The cost of the newspaper advertising campaign (excluding coupon returns) will be $250,000. Other fixed overhead costs are expected to be $90,000 per year. Management has decide that the suggest retail price to the consumer for the 8-ounce can will be $0.50. The only unit variable costs for the product are $0.18 for material and $0.06 for labor. The company intends to give retailers a margin of 20 percent off the suggest retail price and wholesalers a margin of 10 percent of the retailers cost of the item

1. At what price will DCI be selling its product to the wholesalers?
2. What is the contribution per unit for Zap?
3. What is the break-even unit volume in the first year?
4. What is the first-year break-even share of the market?

3. Video Concepts, Inc. (VCI) manufactures a line of videocassette recorders (VCRs) that are distributed to large retailers. The line consists of three models of VCRs. The following data are available regarding the models:

Model	Selling Price per Unit	Variable Cost per Unit		Demand/Year (units)
Model LX1	$175		$100	2,000
Model LX2	$250		$125	1,000
Model LX3	$300		$140	500

VCI is considering the addition of a fourth model to its line of VCRs. This model would be sold to retailers for $375. The variable cost of this unit is $225. The demand for the new Model LX4 is estimated to be 300 units per year. 60% of these unit sales of the new model is expected to come from other models already being manufactured by VCI (10% from Model LX1, 30% from Model LX2, and 60% from Model LX3). VCI will incur a fixed cost of $20,000 to add the new model to the line. Based on the preceding data, should VCI add the new Model LX4 to its line of VCRs? Why?