Smith Corp. has determined that its contribution margin, (P – MC)/P, is 40%. A recent market research study found the following relationship between adverting outlays and sales revenue.
Advertising Outlays Gross Revenues from Sales
$500,000 ........... $4,000,000
$600,000 ........... $4,500,000
$700,000 ........... $4,900,000
$800,000 ........... $5,200,000
$900,000 ........... $5,420,000
$1,000,000 .......... $5,600,000
a. What is the contribution to profits from increasing advertising sales by $1 if Smith Corp. is currently spending between $500,000 and $600,000 on advertising?
b. What is the profit maximizing level of advertising? Explain.