Question

In: Accounting

Smith’s Department Store needs to decide which advertising budgeting method to use. The following information is...

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.

  • Affordable Budget Method

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                                  

  • Percentage of Sales Method

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? _____

  • Budget Based on Objectives Method

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

Solutions

Expert Solution

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%


Related Solutions

A department store is planning their Spring advertising campaign. They have budgeted $200,000 to use for...
A department store is planning their Spring advertising campaign. They have budgeted $200,000 to use for advertising, and wish to reach the maximum number of potential customers. The advertising firm they are using has carefully obtained the following planning data, to ensure that their client is able to get the most customer impressions possible. Characteristics Advertising Medium Newspaper Radio Television People reached per unit 40,000 120,000 175,000 Number of persons with higher income per unit 25,000 40,000 56,000 Number of...
Which of the following is an advantage of the budgeting process? It focuses on the needs...
Which of the following is an advantage of the budgeting process? It focuses on the needs of customers and ensures that they receive good service and high-quality products at a fair price. It can force management to focus on the past and not be distracted by current activities of the organisation. It can help facilitate goal congruence throughout the organisation. It may lead to managers introducing budgetary slack.
Dils Brother Department Store prepares budgets quarterly. The following information is available for use in planning...
Dils Brother Department Store prepares budgets quarterly. The following information is available for use in planning the second quarter budgets for 2017. Dils Brother Department Store Balance Sheet March 31, 2017 Assets    Liabilities and Stockholders' Equity Cash $ 4,000    Accounts payable $31,000 Accounts receivable 31,000    Dividends payable 15,000 Inventory 36,000    Rent payable 3,000 Prepaid Insurance 3,000    Stockholders' equity 50,000 Fixtures 25,000 Total assets $99,000    Total liabilities and equity $99,000 Actual and forecasted sales for...
Use the resolution method to decide if the following formulas are valid or not. If the...
Use the resolution method to decide if the following formulas are valid or not. If the formula is valid, provide a resolution proof; if it is not valid, provide an interpretation which falsifies the formula. (a) (A↔(A∧B))→(A→B)
1. A retail store runs an advertising campaign on a radio station. They decide to measure...
1. A retail store runs an advertising campaign on a radio station. They decide to measure the effectiveness of the campaign by measuring the increase in customers compared to previous days. They choose 35 days at random, and find the average number of customers to have increased by 83.3 customers per day. Historically, the number of customers per day has a standard deviation of 17.5 customers. What is the 95% confidence interval for the population mean increase in customers? Select...
Use Both the Replacement Chain Method and the Equivalent Annual Annuity Method to decide which projects...
Use Both the Replacement Chain Method and the Equivalent Annual Annuity Method to decide which projects are the best: Bob the builder is deciding between two mutually exclusive projects. The first project is 3 years long with an initial cash outflow of $13000 and expected annual inflows of $5000. The second project is 6 years long with an initial cash outflow of $15000 and annual cash inflows of $3500. The cost of capital is 10%.
A department store investigated the effects of advertising expenditure on the weekly sales for its men's...
A department store investigated the effects of advertising expenditure on the weekly sales for its men's wear, children's wear, and women's wear departments. Five weeks were randomly selected for each department to be used in the analysis (this makes 15 weeks in total, ?n). The variables are as follows: ?y = weekly sales ?1x1 = advertising expenditure ?2x2 = 1 if it is the children's wear department and a 0 otherwise ?3x3 = 1 if it is the women's wear...
Which method of promotional budgeting should a small retailer and a large retailer use? Why?
Which method of promotional budgeting should a small retailer and a large retailer use? Why?
Lucy Brown is the manager of one department in a big store. In this capacity, which of the following kinds of information would he be interested in?
QUESTION 1Lucy Brown is the manager of one department in a big store. In this capacity, which of the following kinds of information would he be interested in?A.Financial, economic, and nonfinancial dataB.Economic dataC.Nonfinancial DataD.Financial DataQUESTION 2A company has high operating leverage when:A.small percentage changes in revenue produce large percentage changes in profit.B.the organization makes purchases on credit instead of paying cash.C.a company utilizes debt to finance its assets.D.management buys enough of the company's shares of stock to take control of...
A company has to decide which size store to build. The profitability of a particular store...
A company has to decide which size store to build. The profitability of a particular store size depends on level of demand that ends up developing in the market, which is outside of your control. State 1 is low demand while state 2 is high demand. Use the information below to answer all parts to this question. Payoff Table Alternatives State 1 State 2 Store size 1 200 175 Store size 2 150 185 Store size 3 140 200 Store...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT