a. Does it make sense to spend the additional $1,000,000 ? Why or why not?

b. Since 30% carry-over effect is just an estimate and is subject to error. The management wants to do a sensitivity analysis. What should the minimum carry-over effect be to justify (break-even) the $1,000,000 additional spending?

Assume the current ad spending for company Y is $4,000,000 with a sales of $34,000,000. Company X plans to spend additional $1,000,000 on advertising. It is estimated that the elasticity of ad is .25 for the initial sales increase. Furthermore, from historical data, it is learned that the carry-over effect of such ad is about 30% and the product profit contribution ratio is 35%.