A company sells two products: Sparta and Volta. Volta is manufactured by a third-party supplier, which charges the company a contractual price for each unit of Volta manufactured. A summary of revenue and costs assumptions for each product is as follows.
The company has the opportunity to spend an additional $10,000 in promotional expenditures on either Sparta or Volta, anticipating a 10% increase in unit sales volume as a result. Both product lines have idle capacity and can support the increase in unit volume. The company should spend the additional promotional expenditure on:
A) Sparta, because it would generate an additional $10,000 in operating profit.
B) Sparta, because it would generate an additional $60,000 in operating profit.
C) Volta, because it would generate an additional $20,000 in operating profit.
D) Volta, because it would generate an additional $10,000 in operating profit.

Question

A company sells two products: Sparta and Volta. Volta is manufactured by a third-party supplier, which charges the company a contractual price for each unit of Volta manufactured. A summary of revenue and costs assumptions for each product is as follows.
 The company has the opportunity to spend an additional $10,000 in promotional expenditures on either Sparta or Volta, anticipating a 10% increase in unit sales volume as a result. Both product lines have idle capacity and can support the increase in unit volume. The company should spend the additional promotional expenditure on:
A) Sparta, because it would generate an additional $10,000 in operating profit. 
B) Sparta, because it would generate an additional $60,000 in operating profit. 
C) Volta, because it would generate an additional $20,000 in operating profit. 
D) Volta, because it would generate an additional $10,000 in operating profit.

Quizplus · Accepted Answer

Sparta: [($10-3) x (100,000 x 10%)] - $10,000 = $60,000
Volta: [($20-10) x (20,000 x 10%)] - $10,000 = $10,000

A Company Sells Two Products: Sparta and Volta