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%.

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

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? 

Answer rating: 100% (QA)

Answer 1 Yes it makes sense to put 1000000 more on advertising as it contributes to 35 of the pro... View the full answer