Profitability by Advertising Intensity

2. End-of-Chapter Question: Chapter 1, Probicl 16. As a marketing manager for one of the world's largest automakers, you are responsible for the advertising campaign Page 26 for a new energy-efficient sports utility vehicle. Your support team has prepared the accompanying table. which summarizes the (year-end) profitability, estimated number of vehicles sold. and average estimated selling price for alternative levels of advertising. The accounting department projects that the best alternative use for the funds used in the advertising campaign is an investment returning 9 percent. In light of the staggering cost of advertising (which accounts for the lower projected profits in years I and 2 for the high and moderate advertising intensities). the team leader recommends a low advertising intensity in order to maximize the value of the firm. Do you agree? Explain. (LO1, L05, LO6, LO7) Profitability by Advertising Intensity Profits (in millions) Units Sold (in thousands) Average Selling Price Year 1 Year 2 Year 3 Year 1 Year 2 Year 3 Year 1 Year 2 Year 3 Advertising Intensity High $20 $ 80 $300 10 60 120 $35,000 $36.500 $38.000 Moderate 40 80 135 5 12.5 25 35,800 36.100 36.300 Low 75 110 118 6 7.2 35.900 36,250 36.000