Question

Bill is the owner of M.E. Inc., which produces miniature internal combustion engines that are used to operate hydraulic systems in heavy machinery. Bill wants to expand his market share by three share points. Total industry sales are $120 million; M.E. Inc. sales are $30 million with a gross margin of $1.2 million. The total industry marketing expenditures are $4 million; M.E.'s current marketing budget is $1 million. What is the amount of the gain/loss M.E. Inc. will experience if they make the investment to acquire three additional market share points, and should M.E. Inc. make this investment

Answer 1

Answer:

ME should make the investment because it results in not only higher market share but also a $24,000 increase in profits.

Explanation:

Currently ME's marketing expenditures represent 25% of the industry's marketing expenditures and it matches his market share. Using the competitive parity approach, three additional market share points should cost $120,000 ($40,000 for each point) and should increase gross profits to a total of $1,344,000 ($144,000 increase). The difference between incremental revenue and incremental expenses = $144,000 - $120,000 = $24,000.