If you do know the profit margin for the advertised product (whether dollars or

Question

If you do know the profit margin for the advertised product (whether dollars or percent) then you can use this budget approach to work out a budget plan with your client such that she knows exactly how much of a sales increase is needed to pay-out the advertising investment. Here's how this works Let's say that you know that your client clears a 10% margin of profit on each unit of product sold and you know that average annual sales for the product is 100,000,000 units and the sales price is $3.50 per unit. First, we need to figure out how much budget we have to work with. Do this by converting the margin percentage into a total margin estimate. Take 10% of the unit price times the 100,000,000 units sold on average per year $0.35 x 100,000,000 $35,000,000 Next, you work with the client to determine what portion of the total annual profit is available for investment in the upcoming year's media plan. Let's say you agree to invest S3,500,000. Now, you need to defend that investment amount by calculating a pay-out point. The pay- out point is the point at which incremental sales growth will generate enough profit to cover the cost of the initial investment. Pay-out in unit sales Investment divided by Unit Margin Unit Pay-out $3,500,000 divided by $0.35-10,000,000 Finally, you and the client need to agree on whether this is a reasonable increase in unit sales given the investment in the business. For this example, the increase in unit sales would be 10%. Now you do the math. Let's say that your client has agreed to spend $5,000,000 next year. If you know that the per-unit margin is $0.23, how many units must be sold to pay-out the S5,000,000? If average annual sales for the product is 50,000,000 units, what is the percent increase needed in unit sales to pay-out the investment? Is this a reasonable amount? Why or why not? 45

Explanation / Answer

a)Payout units= $5000000/$0.23= 21739130.43 units to be sold

b)Unit margin= 50000000 units/$5000000=10 unit/$

= 2.3 units for .23$ margin

This gives 2.3*50000000 units=115000000 units

Percentage increase in sales= (115-50)/50=130%

Certainly this is not reasonable because increase in such a sale can't be done due to production rate and market demand rate can't increase so rapidly.

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