Question

a). The below calculation indicated on the both parameter of short run and life time profit ,option 3 is one of the most suitable for advertisement of the company, calculated below.

Costs	Opt. 1 Mon. Online Magazine	Opt.2 Affiliated Retail Store	Opt. 3 Search Engine
Variable	$0	$0.25/click	$0.005/click
Total variable cost		1445	420
Fixed	$500	$50	Auction
Total Cost	$500	$1,495	$420
Outcomes
Expected Clicks	1,550	5,780	84000
Average Pg. views	20	5	1.5
% of Clicks Converted	7%	3%	0.14%
Profit
Short term($3.5/client)	$379.75	$606.90	$411.60
Long Term ($25/client)	$2,712.50	$4,335.00	$2,940.00
Profit / Total cost
Short term	0.7595	0.405953177	0.98
Long term	5.425	2.899665552	7

b). To determine the benefits of an advertising campaign, should Hula Island use the profit on the first sale or the expected lifetime profits? Why?

c). To choose between advertising campaigns, should Hula Island use the total expected profits or the ratio of total expected profits to advertising costs? Why?

2. Using your answer from Question 1 (either short-run or lifetime, total expected profits, or the ratio of total expected profits to advertising costs), determine the winner of the comparison between Options 1 and 2. Advertising Option 3 is different from the other two options in that the auction determines the fixed advertising cost. Assume Hula wins the search engine auction with a bid of $105. Which advertising option (1, 2, or 3) would you recommend to management?

Answer 1

Part b:

In order to assess the benefits of advertisement campaign Hula Island must use expected life time profit instead of current profit only. This is because the use of lifetime profit would provide better idea as to the overall impact of advertisement campaign on the performance of the organization. Apart from that advertisement campaign may also take times with the customers thus, it would be not justified to use only the current profit to assess the benefit of advertisement campaign.   

Part c:

Obviously, Hula Island should chose the ratio of total expected profits to advertisement costs as it will help the management to assess the impact of advertisement costs on the total expected profit.

Answer 2:

Particulars	Option 1	Option 2
Total costs ($)	500	1495
Long term profit ($)	2712.5	4335
Profit / Total costs
Long run	5.425	2.89966555

As is clear from the above that option 1 is better than option 2 as in the long run though expected profit is higher for option 2 but comparison of long run costs with that of long run profit clearly suggests that the advertisement expenditures for option 1 is giving much more return proportionately, i.e. 5.425 times in the long run for option 1 whereas only 2.90 times for option 2.

Particulars	Option 1	Option 2	Option 3
Total costs ($)	500	1495	420
Add: Auction costs ($)			105
Total costs after auction ($)	500	1495	525
Long term profit ($)	2712.5	4335	2940
Profit / Total costs
Long run	5.425	2.89966555	5.6

As can be seen that despite the auction cost of $105 the long run benefit from option 3 with 5.6 times is higher than long run return from other two options. Thus, the organization should select option 3.