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Santos company is planning its advertising campaign for next year and has prepared the following budget data based on a zero advertising expenditure:

Normal plant capacity 200,000 units

Sales 150,000 units

Selling price 25 per unit

Variable manufacturing costs 15 per unit

Fixed manufacturing costs 800,000

Fixed selling costs 700,000

An advertising agency claims that an aggressive advertising campaign would enable Santos to increase its units sales by 20%. What is the maximum amount that Santos Company can pay for advertising and have an operating profit of 200,000 next year? Show solution.

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