Alliance, Inc. sells gas lamps to consumers through retail outlets. Total industry sales
for Alliance’s relevant market last year were $100 million, with Alliance’s sales representing 5% of that total. Contribution margin is 25%. Alliance’s sales force calls on
retail outlets and each sales rep earns $50,000 per year plus 1% commission on all
sales. Retailers receive a 40% margin on selling price and generate average revenue of
$10,000 per outlet for Alliance.
a. The marketing manager has suggested increasing consumer advertising by
$200,000. By how much would dollar sales need to increase to break even on this
expenditure? What increase in overall market share does this represent?
b. Another suggestion is to hire two more sales representatives to gain new consumer
retail accounts. How many new retail outlets would be necessary to break even on
the increased cost of adding two sales reps?
c. A final suggestion is to make a 10% across-the-board price reduction. By how much
would dollar sales need to increase to maintain Alliance’s current contribution?
(See endnote 13 to calculate the new contribution margin.)
d. Which suggestion do you think Alliance should implement? Explain your recommendation