A company has a contribution margin of $700 per unit. They have fixed costs of $140,000 per period. The company has been breaking
even for several periods in a row but has not been able to reach
profitability.
The head of marketing says they can increase the number of units
they sell per period by 20% in the next period if he can spend
$30,000 on an advertising campaign.
The increase in sales will last only as long as the advertising
campaign. When the campaign stops, sales are expected to return
to historical levels.
Based on the forecast, should they spend the money on the ad
campaign?