Assume the current ad spending for company Y is $4,000,000 witha sales of $34,000,000. Company X plans to spend additional$1,000,000 on advertising. It is estimated that the elasticity ofad is .25 for the initial sales increase. Furthermore, fromhistorical data, it is learned that the carry-over effect of suchad is about 30% and the product profit contribution ratio is35%.
Does it make sense to spend the additional $1,000,000 ? Why orwhy not? (5 points)
Since 30% carry-over effect is just an estimate and is subjectto error. The management wants to do a sensitivity analysis. Whatshould the minimum carry-over effect be to justify (break-even) the$1,000,000 additional spending? (5 points)
