Selecting the better strategy to gain highest overall profit

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Reference no: EM1331057

Gobi Inc. has sales of $40,000,000. The contribution margin is 40% and the fixed costs are $3,000,000. The variable cost per unit is $12. The company is considering two different strategies for increasing their profits:

1) Spend $2,000,000 in advertising: the results is expected to increase the company's sales by 25%

2) Reduce the price by 20%; the price-demand elasticity is -3.0

Which of the two strategies will generate the highest overall profits?

Reference no: EM1331057

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