In 2009, ABC Company made $2M of net profit and spent $100,000 on advertisement.
ID: 2505572 • Letter: I
Question
In 2009, ABC Company made $2M of net profit and spent $100,000 on advertisement. In 2010, it made $2.5M of net profit and spent $150,000 of advertisement. Based on this information, if ABC
In 2009, ABC Company made $2M of net profit and spent $100,000 on advertisement. In 2010, it made $2.5M of net profit and spent $150,000 of advertisement. Based on this information, if ABC's advertisement expenditure increases by $20,000 in 2011, how much do you expect its net profit to increase? Explain why the ratios of net profit to advertisement expenditure in 2009 and 2010 are different from the slope of the net profit advertisement relationship.Explanation / Answer
in 2009
net profit=$ 2M
expenditure on advertisement=$100,000
in 2010
net profit=$ 2.5M
expenditure on advertisement=$150,000
so from 2009 to 2010
for an increase of $50,000 on advertisement there is an increse of $0.5 M in net profit
so if the advertisement expenditure increses by $20,000 in 2011
the increse in net profit =(0.5 M)*20000/50000 = $0.2 M
the ratio of net profit to advertisement expenditure in 2009 =(2*10^6)/(10^5) =20
the ratio of net profit to advertisement expenditure in 2010=(2.5*10^6)/(1.5*10^5) =50/3
the slope of the net profit advertisement relationship =( 2.5-2)*10^6/(1.5-1)*10^5 =10
THEY ARE DIFFERENT BECAUSE SLOPE IS CALCULTED BETWEEN TWO POINTS OR TWO CASES WHERE RATIOS ARE CALCULATED AT SINGLE POINT
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