In: Accounting
Smith’s Department Store needs to decide which advertising budgeting method to use. The following information is needed to calculate Smith’s advertising budget using all three methods.
Last year’s sales were $9,815,000 and are projected to increase by 4.5% for next year. Last year’s expenses were 41% of last year’s sales and are projected to decrease by 1.5% for next year. Last year the business earned a profit of $4,587,600. Profit is expected to increase by 2% over last year’s figures. Based on the last year’s figures and the projected changes in sales, expenses and profit, calculated forecasted sales, expenses and profits for the upcoming year. Calculate the amount left to spend on advertising.
Forecasted sales $10,256,675 Forecasted expenses $4,051,387
Forecasted profit expectation $4,679,352
Amount left to spend on advertising $1,525,936
The following are the percentage of sales figures other department stores in the country use to determine advertising budgets. Calculate the mean or average for the industry: 5%, 7.5%, 4%, 11%, 9.75%, 10%, and 8%. The average or mean for the industry is _____
Based on the industry mean/average, and using the forecasted sales for Smith’s in the affordable budget method from above, what is the amount Smith’s should use for its advertising budget? _____
Below are the activities on which Smith’s Department Store will base its budget for the entire year.
Month |
Sales Goal |
Sales Event |
Advertising Cost |
% of Sales |
January |
$256,417 |
Winter Clearance |
$8,975 |
|
February |
$299,153 |
Valentines & Presidents Days |
$14,958 |
|
March-April |
$598,306 |
Easter, Spring Fling |
$50,856 |
|
May-June |
$683,778 |
Summer Days |
$30,770 |
|
July |
$854,723 |
July 4th and Clearance |
$66,241 |
|
August |
$923,850 |
Back to School |
$64,670 |
|
September –October |
$1,500,730 |
Fall Fashions |
$127,562 |
|
November-December |
$3,750,000 |
Winter Sale |
$337,500 |
|
December |
$1,389,718 |
General Christmas Sale |
$90,332 |
|
Totals |
XXXXX |
Mr Smith needs to take decision on which advertising budgeting method to use.
Method 1 Affordable Budget Method
Last year
Sales = 9815000
Expenses = 41% of 9815000 = 4024150
Profit = 4587600
Next year
Sales = 9815000 + (9815000*4.5%) = 10256675
Expenses = 10256675 *(41-1.5)% = 4051387
Profit = 4587600 + (4587600*2%) = 4679352
Thus amount left to spend on advertising is = 10256675 - 4051387 - 4679352 = 1525936.
Method 2 Percentage of Sales Method
Average of percentage of advertising budget to Sales in industry
5+7.5+4+11+9.75+10+8 = 55.25
55.25÷7 = 7.9 %
Forcasted sales as per method 1 = 10256675
Amount to be used for advertising budget = 10256675 * 7.9% = 810277
Method 3 Budget based on Objective Method
January = 8975÷256417 *100 = 3.5%
February = 14958÷299153 *100 = 5%
March- April = 50856÷598306 *100 = 8.5%
May-june = $30,770÷$683,778 *100 = 4.5%
July = 66241÷854723 = 7.75%
August = 64670÷923850 * 100 = 7%
September = 127562÷1500730 *100 = 8.5%
October November = 337500÷3750000 *100= 9%
December = 90332÷1389718*100 = 6.5%
Total = 791864÷10256675 = 7.72%