Last month you assumed the position of manager for a large car dealership. The distinguishing feature of this dealership is its
"no hassle" pricing strategy; prices (usually well below the sticker price) are posted on the windows, and your sales staff has a reputation for not negotiating with customers. Last year, your company spent $2 million on advertisements to inform customers about its "no hassle" policy, and had overall sales revenue of $40 million. A recent study from an agency on Madison Avenue indicates that, for each 3 percent increase in TV advertising expenditures, a car dealer can expect to sell 12 percent more cars—but that it would take a 4 percent decrease in price to generate the same 12 percent increase in units sold. Assuming the information from Madison Avenue is correct, should you increase or decrease your firm’s level of advertising? Explain.
1 answer:
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Answer:
an increase in the operating income by $16,322
Explanation:
The computation of the impact in the operating income is given below:
Variable cost of 75 units (1300000 × 75 ÷ 12700) 7,678
Sale price of 75 units (75 × 320) 24,000
Increase in operating income (24000 - 7678) $16,322
hence, the impact in the operating income is that there is an increase in the operating income by $16,322
