Question

Assume the current ad spending for company Y is $4,000,000 with a sales of $34,000,000. Company X plans to spend additional $1,000,000 on advertising. It is estimated that the elasticity of ad is .25 for the initial sales increase. Furthermore, from historical data, it is learned that the carry-over effect of such ad is about 30% and the product profit contribution ratio is 35%.

Does it make sense to spend the additional $1,000,000 ? Why or why not? (5 points)

Since 30% carry-over effect is just an estimate and is subject to error. The management wants to do a sensitivity analysis. What should the minimum carry-over effect be to justify (break-even) the $1,000,000 additional spending? (5 points)

Answer 1

1) Yes it bodes well to put $1,000,000 more on promoting as it adds to 35% of the item benefit The essential use for publicizing flexibility of interest is ensuring promoting costs are supported by their profits. A value correlation of AED and value flexibility of interest (PED) can be utilized to compute whether additionally promoting would amplify benefit. PED applied close by AED can help figure out what effect estimating changes may have on request. For most extreme benefit, an organization's publicizing to-deals proportion ought to be equivalent to less the proportion of the promoting and value versatilities of interest, or A/PQ = - (Ea/Ep). On the off chance that an organization finds that their AED is high, or if their PED is low, they ought to publicize intensely.

2) Total Sales-$34,000,000

Assume Company cuts its present advertisement spending from $4,000,000 to $3,000,000 to build the deals

Units Sold= ($34,000,000 +0)/($3,000,000-$1,000,000)

Units Sold= $34,000,000/$2,000,000

Persist impact for make back the initial investment least ought to be 17%

Which would prompt $51,000,000 of absolute deals.