Question

Smith’s Department Store needs to decide which advertising budgeting method to use. The following information is needed to calculate Smith’s advertising budget using all three methods. • Affordable Budget Method Last year’s sales were $9,815,000 and are projected to increase by 4.5% for next year. Last year’s expenses were 41% of last year’s sales and are projected to decrease by 1.5% for next year. Last year the business earned a profit of $4,587,600. Profit is expected to increase by 2% over last year’s figures. Based on the last year’s figures and the projected changes in sales, expenses and profit, calculated forecasted sales, expenses and profits for the upcoming year. Calculate the amount left to spend on advertising. Forecasted sales Forecasted expenses Forecasted profit expectation Amount left to spend on advertising

Answer 1

Answer:

(A) $1,203,250

(B) $10,256,675

(C) $4,051,387

(D) $4,679,352

(E) $1,525,936

Explanation:

(a) Amount left to spend on advertising:

Sales (for the year) = $9,815,000

Expenses = 41% of last year sales

                = 0.41 × $9,815,000

                = $4,024,150

Profit = $4,587,600

Amount spent on advertising = Sales - Expenses - Profit

                                                 = $9,815,000 - $4,024,150 - $4,587,600

                                                 = $1,203,250

The amount spent on advertising last year is $1,203,250.

(b)

Forecasted sales = Sales(1 + 4.5%)

                             = $9,815,000(1 + 0.045)

                             = $9815000 × 1.045

                             = $10,256,675

(c)

Forecasted expenses = Forecasted sales (41% - 1.5%)

                                     = $10,256,675 × 39.5%

                                     = $4,051,387

(d)

Forecasted profit expectation = Profit × (1 + percent increase in profit)

                                                  = $4,587,600 (1 + 0.02)

                                                  = $4,587,600 × 1.02

                                                  = $4,679,352

(e) Amount left to spent on advertising:

= Forecasted Sales - Forecasted Expenses - Forecasted Profit expectation

= $10,256,675 - $4,051,387 -  $4,679,352

= $1,525,936

Since the profit and sales were higher and expenses were lower the amount left for advertising expenses was higher.