WSR Inc. WSR Inc. sells a variety of drink and food products including potato chips and sodas. The segmented income statements for these two products are as follows:
WSR's management is considering a special advertising campaign that will run during a major sporting event. The advertising campaign is expected to cost $30,000 and only one product can be featured. In-house marketing studies show that the campaign could increase sales of the soda division by $200,000 or increase sales of the chips division by $275,000.
Refer to the WSR Inc. information above. Which of the following statements is true regarding which product the advertising campaign should feature?
A) Overall company profits will be higher by $45,000 if the campaign features chips rather than soda.
B) Overall company profits will be higher by $28,750 if the campaign features chips rather than soda.
C) Overall company profits will be higher by $13,750 if the campaign features chips rather than soda.
D) Overall company profits will be higher by $26,250 if the campaign features soda rather than chips.

Question

WSR Inc. WSR Inc. sells a variety of drink and food products including potato chips and sodas. The segmented income statements for these two products are as follows:
 WSR's management is considering a special advertising campaign that will run during a major sporting event. The advertising campaign is expected to cost $30,000 and only one product can be featured. In-house marketing studies show that the campaign could increase sales of the soda division by $200,000 or increase sales of the chips division by $275,000.
Refer to the WSR Inc. information above. Which of the following statements is true regarding which product the advertising campaign should feature?
A) Overall company profits will be higher by $45,000 if the campaign features chips rather than soda. 
B) Overall company profits will be higher by $28,750 if the campaign features chips rather than soda. 
C) Overall company profits will be higher by $13,750 if the campaign features chips rather than soda. 
D) Overall company profits will be higher by $26,250 if the campaign features soda rather than chips.

Quizplus · Accepted Answer

To determine which product the advertising campaign should feature, we need to calculate the incremental profit for each division.

For the soda division, the incremental profit would be:

Incremental Revenue = $200,000 
Incremental Cost = $0 (since no extra costs are incurred)
Incremental Profit = $200,000

For the chips division, the incremental profit would be:

Incremental Revenue = $275,000 
Incremental Cost = $220,000 (Cost of Goods Sold + Incremental Advertising Cost)
Incremental Profit = $55,000

Since the chips division has a higher incremental profit, featuring chips in the advertising campaign would result in higher overall company profits.

To determine the exact difference in profits, we need to subtract the cost of the advertising campaign from the incremental profit:

For chips: $55,000 - $30,000 = $25,000

For soda: $200,000 - $30,000 = $170,000

Thus, the overall company profits will be higher by $25,000 if the advertising campaign features chips rather than soda.

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