Question

s a marketing manager for one of the world’s largest automakers, you are responsible for the advertising campaign for a new energy-efficient sports utility vehicle. Your support team has prepared the following table, which summarizes the (year-end) profitability, estimated number of vehicles sold, and average estimated selling price for alternative levels of advertising. The accounting department projects that the best alternative use for the funds used in the advertising campaign is an investment returning 9 percent. In light of the staggering cost of advertising (which accounts for the lower projected profits in years 1 and 2 for the high and moderate advertising intensities), the team leader recommends a low advertising intensity in order to maximize the value of the firm. Do you agree?

Explain. Profitability by Advertising Intensity

Profits (in millions) Units Sold (in thousands) Average Selling Price

Year 1 Year 2 Year 3 Year 1 Year 2 Year 3 Year 1 Year 2 Year 3

Advertising Intensity

High $20 $ 80 $300 10 60 120 $35,000 $36,500 $38,000

Moderate $40 $ 80 $135 5 12.5 25 $35,800 $36,100 $36,300

Low $75 $110 $118 4 6 7.2 $35,900 $36,250 $36,000

Answer 1

Ans. The team leader recommends low advertising cost. However, it is to be noted that unless intensive advertisements are made, proper selling won't be possible.

	High			Moderate			Low
	Profits (m)	Units Sold	Average SP	Profits (m)	Units Sold	Average SP	Profits (m)	Units Sold	Average SP
Year 1	$20	10,000	$35,000	$40	5,000	$35,800	$75	4,000	$35,900
Year 2	$80	60,000	$36,500	$80	12,500	$36,100	$110	6,000	$36,250
Year 3	$300	120,000	$38,000	$135	25,000	$36,300	$118	7,200	$36,000

However from the data provided, it is quite evident that Moderate and Low intensive advertisement expenditure results in higher profits in the initial years but High intensive advertisement expenditure results in higher profits in the final year.

Let us now calculate present value of profits to arrive at a more conclusive view-

	High			Moderate			Low
	Profits	PVf @9%	PV of Profits	Profits	PVf @9%	PV of Profits	Profits	PVf @9%	PV of Profits
Year 1	$20	0.917	$18	$40	0.917	$37	$75	0.917	$68.78
Year 2	$80	0.842	$67	$80	0.842	$67	$110	0.842	$93
Year 3	$300	0.772	$232	$135	0.772	$104	$118	0.772	$91
Total	$400		$317	$255		$208	$303		$252

Therefore, the contention of the team leader that low advertising cost will give more profit is wrong. The company should go for High Intensive Advertisement Cost.