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No Ache Company has a division that produces a single product - a backache reducing pill - that sells for $1. The pill ingredients cost No Ache $0.20 and the pills are produced in an automated factory that the firm rents. The monthly rental cost of $200,000 includes the salaries of all the people needed to run the factory. No Ache currently spends $60,000 a month in advertising the backache pill. During January the firm sold 400,000 of the bachache pills. The company is exploring several options that may increase the sale of these pills. Each of these options would entail a more expensive advertising campaaign.
REQUIRED:
a. What is the current breakeven point for this pill? What is the safety margin? How much is the current pretax profit for January?
b. No Ache is considering an aggressive new ad campaign for the existing pill along with a rebate program. The new ads would cost approximately $100,000 a month and replace the current $60,000 of ads. The rebate campaign would provide customers with a half-off coupon on their next purchase. When these changes are fully implemented, No Ache's marketing people estimate that pill sales will jump to 700,000 a month with approximately 20 percent of the sales being tied to rebates. What would No Ache's retax be under this option?
c. The company is evaluating an addition to the pills' active ingredient that would reduce the time it would take the pill to work. This ingredient will ad $0.05 to the cost of each pill and would be supported by an additional $30,000 of advertising a month. Assuming No Ache also raises the price of the pill to $1.10, how many pills must be sold to earn the same profit as the firm makes in January?
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