Answer:
All About Sports will incur net loss of $50,000 for additional share point so, it is not advisable to start the new share points.
Explanation:
According to 1.5 rule of competitive parity budgeting to gain the 4 market share points All About Sports will need to spend that will be needed for 6 as follow.
4 x 1.5 = 6
All About Sports is not able to buy 4 share point by simply spending $275,000 each. they need additional $1.65 million to invest in additional market share points.
Cost of 4 share points = $275,000 x 6 = $1,650,000
On the other hand All About Sports has market share of 20%.
( $14 million / $70 million ) x 100 = 20% = 20 share points
Firm gross margin is $8000,000 and gross margin per share point is $400,000 ( $8,000,000 / 20 ).
Total Benefit for additional share point = $400,000 x 4 = $1,600,000
Net Benefit = $1,600,000 - $1,650,000 = -$50,000
As All About Sports will incur net loss of $50,000 for additional share point so, it is not advisable to start the new share points.
