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EXAMPLE The Advertising Budget Decision As product-marketing manager, one of our jobs is to prepare recommendations to the Executive Committee as to how advertising expenditures should be allocated. Last year’s advertising budget of $40,000 was spent in equal increments over the four quarters. Initial expectations are that we will repeat this plan in the coming year. However, the committee would like to know whether some other allocation would be advantageous and whether the total budget should be changed. Our product sells for $40 and costs us $25 to produce. Sales in the past have been seasonal, and our consultants have estimated seasonal adjustment factors for unit sales as follows: Q1: 90% Q2: 110% Q3: 80% Q4: 120% (A seasonal adjustment factor measures the percentage of average quarterly demand experienced in a given quarter.) In addition to production costs, we must take into account the cost of the sales force (projected to be $34,000 over the year, allocated as follows: Q1 and Q2, $8,000 each; Q3 and Q4, $9,000 each), the cost of advertising itself, and overhead (typically around 15 percent of revenues). Quarterly unit sales seem to run around 4,000 units when advertising is around $10,000. Clearly, advertising will increase sales, but there are limits to its impact. Our consultants several years ago estimated the relationship between advertising and sales. Converting that relationship to current conditions gives the following formula: Unit sales = 35 × seasonal factor × ?(3,000 + Advertising)

EXAMPLE
The Advertising Budget Decision

As product-marketing manager, one of our jobs is to prepare recommendations to the Executive Committee as to how advertising expenditures should be allocated. Last year’s advertising budget of $40,000 was spent in equal increments over the four quarters. Initial expectations are that we will repeat this plan in the coming year. However, the committee would like to know whether some other allocation would be advantageous and whether the total budget should be changed.
Our product sells for $40 and costs us $25 to produce. Sales in the past have been seasonal, and our consultants have estimated seasonal adjustment factors for unit sales as follows:

Q1: 90%
Q2: 110%
Q3: 80%
Q4: 120%

(A seasonal adjustment factor measures the percentage of average quarterly demand experienced in a given quarter.)
In addition to production costs, we must take into account the cost of the sales force (projected to be $34,000 over the year, allocated as follows: Q1 and Q2, $8,000 each; Q3 and Q4, $9,000 each), the cost of advertising itself, and overhead (typically around 15 percent of revenues).
Quarterly unit sales seem to run around 4,000 units when advertising is around $10,000. Clearly, advertising will increase sales, but there are limits to its impact. Our consultants several years ago estimated the relationship between advertising and sales. Converting that relationship to current conditions gives the following formula:

Unit sales = 35 × seasonal factor × ?(3,000 + Advertising)

EXAMPLE
The Advertising Budget Decision

As product-marketing manager, one of our jobs is to prepare recommendations to the Executive Committee as to how advertising expenditures should be allocated. Last year’s advertising budget of 40,000 was spent in equal increments over the four quarters. Initial expectations are that we will repeat this plan in the coming year. However, the committee would like to know whether some other allocation would be advantageous and whether the total budget should be changed.
Our product sells for40 and costs us 25 to produce. Sales in the past have been seasonal, and our consultants have estimated seasonal adjustment factors for unit sales as follows:

Q1: 90%
Q2: 110%
Q3: 80%
Q4: 120%

(A seasonal adjustment factor measures the percentage of average quarterly demand experienced in a given quarter.)
In addition to production costs, we must take into account the cost of the sales force (projected to be34,000 over the year, allocated as follows: Q1 and Q2, 8,000 each; Q3 and Q4,9,000 each), the cost of advertising itself, and overhead (typically around 15 percent of revenues).
Quarterly unit sales seem to run around 4,000 units when advertising is around 10,000. Clearly, advertising will increase sales, but there are limits to its impact. Our consultants several years ago estimated the relationship between advertising and sales. Converting that relationship to current conditions gives the following formula:

Unit sales = 35 × seasonal factor × ?(3,000 + Advertising)

Added by Stacy V.

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