AdCreate is a full-service advertising agency with several high-profile marketing firms as clients. Given their vast client list and the varied services they provide to different clients, they are compensated differently by different clients. Jacob Stein, who recently joined AdCreate in the finance department, was asked to review the various compensation models being used by some of AdCreate's biggest clients.

The type and amount of services an ad agency performs vary from one client to another. As a result, agencies use a variety of methods to get paid for their services. Agencies are typically compensated in three ways: commissions, some type of fee arrangement, or percentage charges.

Read the report below, which provides a summary of AdCreate's compensation agreements with four of its major clients, and answer the questions that follow.

AdCreate has a negotiated commission system agreement with Worry Free Financial. Worry Free Financial advertises on TV mainly, and has the following sliding scale for media commissions in its agreement with AdCreate: 15% commission for media expenditures of less than $300,000, 12.5% commission for media expenditures between $300,000 and $400,000, and 10% commission for media expenditures above $500,000.

AdCreate has a cost-plus agreement with Still Water Furnishings. Under the cost-plus terms, AdCreate uses a mark up of 13% for services provided to Still Water Furnishings.

With Anchor Motors, AdCreate has an incentive-based agreement. Under the terms of this agreement, AdCreate gets to keep the full 15% commission from media if Anchor Motor's sales for the period of advertising show an increase of 5% or greater compared to sales in the same period the previous year. For a sales increase between 3% and 5%, AdCreate gets to keep 13% out of the 15% media commission. Finally, for a sales increase between 1% and 3%, AdCreate gets to keep 10% out of the 15% media commission.

AdCreate has a percentage charges agreement with Globe Travel Adventures. Under these terms, AdCreate charges a mark up of 17.65% on services from outside providers like printers, photographers, etc.

Under the cost-plus agreement that AdCreate has with its client Still Water Furnishings, Jacob Stein noticed that AdCreate incurred costs of $625,000 for a print and direct mail campaign during 2010. Under the cost-plus terms, AdCreate used a markup of 13% for services provided to Still Water Furnishings. Based on this information, which of the following is true?

I. The client (Still Water Furnishings) paid AdCreate $706,250 in 2010.
II. AdCreate's income from the Still Water Furnishings account in 2010was $81,250.
III. The client (Still Water Furnishings) paid AdCreate $700,000 in 2010.

Answer rating: 100% (QA)

Question 1 option II is the correct option as per agreement 125 commission is fixed for AdCreate So ... View the full answer