Question

A firm has $200,000 to spend on either direct sales or advertising. Suppose further that if the $200,000 is spent on direct sales, it will bring in an accounting profit of $40,000. Instead, the (accounting) profit it could obtain from a $200,000 investment in advertising is $X. Compare the profitability of the two options if (a) X = 50,000, (b) X = 30,000, or (c) X = 40,000.

Answer 1

When X is 50000, the profitability on advertising is 50000 and that on direct sales is 40000 so that advertising is realizing a higher accounting profit.

When X is 40000, the profitability on advertising is 40000 and that on direct sales is 40000 so that advertising and direct sales both are realizing the same accounting profit.

When X is 30000, the profitability on advertising is 30000 and that on direct sales is 40000 so that direct sales is realizing a higher accounting profit.