Question

8. A business has yearly sales of $1,800,000. The industry average is to spend 6 percent of gross sales on advertising. The company has expenses of $1,200,000 and wants to maintain a profit margin of 30 percent of sales.

1. If this business uses the affordable budget method, what would it establish as its advertising budget?             _____

8. 2. Assume the business wants to spend 3.5% of its sales for advertising. If the business uses the percent of sales method, what would it establish as its advertising budget?             _____
9. J & J Supply’s promotional budget is based on 4% of last year’s sales. Determine this year’s budget based on last year’s sales of $1,000,000. _____

Answer 1

Answer 1 :

a. In case of affordable budget method, advertising budget will be :

Total expense allowed after maintaing gross margin = 70% of sales

Total allowable expense = 70% of 1,800,000 ==> 1,260,000

Advertising budget = Total allowable expense - total expense

Advertising budget = 1260000-1200000 ==> 60000

b. In case of percentage of sales,

Advertising budget = 1,800,000 * 3.5% ==> 63000

c. In case advertising budget is based on last year sales, then

Advertising budget = 1,000,000 * 4% ==> 40000