A firm thinks its consumer promotion expenditures are too high, and wants to cut $500,000 from the budget. Management estimates it will lose 10,000 units in sales if it does. If gross margin is $40 per unit, does cutting the promotion budget make sense?

A firm thinks its consumer promotion expenditures are too high, and wants to cut $500,000 from the budget. Management estimates it will lose 10,000 units in sales if it does. If gross margin is $40 per unit, does cutting the promotion budget make sense?

Solution

Loss due to reduction in promotion expenditure

= Gross margin x Units sales foregone

= $40 x 10,000

= $400,000

Savings due to reduction in expenses of promotion

= $500,000

So, Net savings

= Savings due to reduction in expenses of promotion