Geico, the number two auto insurer with $15 billion in revenue last year, spent

Question

Geico, the number two auto insurer with $15 billion in revenue last year, spent $1.1 billion on advertising and plans to continue spending the same percentage of sales on advertising next year. The average advertising-to-sales ratio for Geico's industry is 0.4 percent of sales. If Geico projects $21 billion in sales next year, using thepercentage-of-sales method of advertising budgeting, how much will the company budget for advertising if basing it on projected sales? How much would Geico budget if the company based its advertising spend on the industryadvertising-to-sales ratio? Is Geico consistent with the average industry spend on advertising?

The advertising-to-sales ratio for the last year is (rounding to four decimal places)

Explanation / Answer

Geico advertising to sales ratio for last year = advertising/sales = 1.1/15 = 7.3333%

Advertising expense based on projected sales = 21*7.3333% = 1.54 billion $

Advertising expense based on industry average = 21*.4% = .084 billion $

No, Geico is spending much higher than industry spend on advertising.

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