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Evaluating Profit-Enhancement Strategies
A small, environmentally-conscious cleaning company wants to increase its profits. The company's profit is calculated as its total sales revenue minus its total input costs. Two strategies are proposed:
- Strategy 1: Launch an expensive advertising campaign to attract more customers.
- Strategy 2: Switch to a cheaper, less environmentally-friendly cleaning solution to reduce the cost of each cleaning job.
Evaluate both strategies. In your evaluation, analyze the potential impact of each strategy on both the company's sales revenue and its input costs. Conclude by recommending one strategy over the other and justify your recommendation based on its likely effect on overall profit.
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- Proposal 1: Launch a marketing campaign that costs $2,000. This is expected to increase the number of units sold by 20%. The cost of producing the additional units is $15 per unit, and the selling price remains unchanged.
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A t-shirt company sells each shirt for $20 and has input costs of $12 per shirt. To attract more customers, the company lowers the price to $18 per shirt. As a result, their sales increase, but their input costs per shirt also rise to $14 due to using a new, more expensive supplier to meet the higher demand. Based on this information, the company's profit per shirt has increased.