A Java applet presented below utilizes the Logistic model created earlier and the information from Table 2 to predict future sales and net profit for Wilmore Paper Company. By entering a possible advertising budget in the applet, the applet can generate expected sales amount and a projected financial statement for WPC based on that advertising budget.
Table 2: Estimated Data for Spring 2008
| Sales | |
$7.52/case |
| c.g.s. | |
$4.61/case |
| Admin/Mktg | |
$7,534,375.86 |
While an increase in advertising budget usually increases sales, it does not always increase the net profit. In an S-shaped relationship like WPC's, after spending on advertising reaches a certain point, it will have less impact on sales resulting in lower revenue while the expense from advertising continues to rise higher. In this stage, as the advertising budget continues to increase, the net profit will be lower even though sales are higher. Therefore, it is important to consider both sales and net profit and find a balance between both when setting an advertising budget.
From the budgeting applet above, the advertising budget that yields the highest sales with a reasonable net profit (5.12% of sales) is $4.2 million, a 5.24% increase over the previous quarter. Based on the projected statement from the applet, predicted unit sales for this advertising budget are 4.65 million cases, a 0.79% increase over the previous quarter compared to 0.75% growth rate in the last quarter. Moreover, the net profit is also predicted to rise 1.5% over the previous quarter to $1.79 million. This proposed advertising budget is the ideal budget amount that provides both increase in sales and net profit. Raising the budget higher to $4.25 million will result in lower net profit than the previous quarter's while lowering the budget to $4.15 will result in higher net profit but lower sales.
Finally, a break-even analysis (Table 3) was conducted to measure the practicality of the proposed $4.2-million advertising budget. To break-even or to achieve at least the same net profit as last quarter's, WPC's sales will have to be $35,521,270.68 with unit sales of 4,723,573 cases. These unit sales increase 2.44% over last quarter's sales. Compared to the average growth rate of 2.49% from the last four spring quarters starting from 2004 which was when sales start to increase at a consistent rate, the 2.44% increase in sales is completely possible making the $4.2-million advertising budget a realistic amount for spring 2008.
Table 3: Spring 2008 Wilmore Paper Company Abbreviated Statement
| |
Winter 2008 |
Spring 2008 |
|||||
| Net Sales | |
$34,582,500.00 | $35,521,270.68 | ||||
| c.g.s. | |
$21,441,150.00 | $22,023,187.82 | ||||
| Gross Margin | |
$13,141,350.00 | $13,498,082.86 | ||||
| Admin/Mktg | |
$7,386,643.00 | $7,534,375.86 | ||||
| Advertising | |
$3,991,000.00 | $4,200,000.00 | ||||
| Net Profit | |
$1,763,707.00 | $1,763,707.00 | ||||