RESPONSE FUNCTION Assignment
Making and Using a Budgeting Model
The Wilmore Paper Company manufactures paper napkins,
toilet tissue, facial tissue, and towels. These products are branded under the
Wilmore Premium label and sold to the consumer market.
Advertising Expenditures and sales (units) are given below for the 30 quarters
preceding Spring 2008 (paper towels only):
|
Quarter |
Year |
Adv$ (1000’s) |
Sales cases (1000’s) |
|
Fall |
2000.00 |
158.00 |
389.00 |
|
Winter |
2001.00 |
218.00 |
483.00 |
|
Spring |
2001.00 |
600.00 |
599.00 |
|
Summer |
2001.00 |
666.00 |
633.00 |
|
Fall |
2001.00 |
749.00 |
728.00 |
|
Winter |
2002.00 |
699.00 |
823.00 |
|
Spring |
2002.00 |
964.00 |
1001.00 |
|
Summer |
2002.00 |
1100.00 |
1490.00 |
|
Fall |
2002.00 |
1251.00 |
1823.00 |
|
Winter |
2003.00 |
1566.00 |
1919.00 |
|
Spring |
2003.00 |
1488.00 |
2506.00 |
|
Summer |
2003.00 |
1776.00 |
2671.00 |
|
Fall |
2003.00 |
1888.00 |
2722.00 |
|
Winter |
2004.00 |
1802.00 |
2922.00 |
|
Spring |
2004.00 |
1880.00 |
2991.00 |
|
Summer |
2004.00 |
2253.00 |
3833.00 |
|
Fall |
2004.00 |
2211.00 |
3811.00 |
|
Winter |
2005.00 |
2340.00 |
3900.00 |
|
Spring |
2005.00 |
2681.00 |
4200.00 |
|
Summer |
2005.00 |
2821.00 |
4321.00 |
|
Fall |
2005.00 |
2931.00 |
4333.00 |
|
Winter |
2006.00 |
3123.00 |
4376.00 |
|
Spring |
2006.00 |
3100.00 |
4321.00 |
|
Summer |
2006.00 |
3452.00 |
4411.00 |
|
Fall |
2006.00 |
3631.00 |
4512.00 |
|
Winter |
2007.00 |
3588.00 |
4523.00 |
|
Spring |
2007.00 |
3621.00 |
4577.00 |
|
Summer |
2007.00 |
3735.00 |
4576.00 |
|
Fall |
2007.00 |
3822.00 |
4577.00 |
|
Winter |
2008.00 |
3991.00 |
4611.00 |
*NOTE: Ad Expenditures and Sales (Winter 2008 sales are an estimate)
|
|
Summer 2007 |
Fall 2007 |
Winter 2008(est.) |
|
Sales |
$35,182,720 |
$34,281,730 |
$34,582,500 |
|
|
@7.47 case |
@7.49 case |
@7.50 case |
|
c.g.s. |
21,193,287 (38%) |
21,597,490 |
21,441,150 |
|
GM |
12,989,114 |
12,684,240 (37%) |
13,141,350 (38%) |
|
Admin/Mktg |
7,511,114 |
7,148,154 |
7,386,643 |
|
ADV |
3,735,000 (10.9%) |
3,822,000 (11.1%) |
3,991,000 (11.5%) |
|
Net Profit |
$1,743,319 ( 5.1%) |
$1,714,086 ( 5.2%) |
$1,763,707 ( 5.1%) |
It can be seen from the above statements that
profits were down
1.7% in the Fall of 2007 over the Summer of 2007; Winter 2008 profits are estimated to be up 2.9% over Fall
2007 profits.
The following information about Spring 2008
operations has been provided by
management to Wilmore’s Strategic Communication manager:
(1) Wilmore plans to charge wholesalers $7.52/case
in Spring 2008.
This price increase of .3% is expected to be in line with those of the main competitors’.
(2) Wilmore’s production costs in the Spring
2008 quarter are
estimated at $4.61/case. This is down from $4.65/case in Winter 2008: (21,441,150/4,611,000=4.65).
(3) Administrative and Other Marketing (excluding advertising) costs are
expected to increase .2% over Winter 2008.
In light of this information,
Wilmore’s Strategic Communication manager is requested to submit a
recommendation to management for the Spring 2008 advertising appropriation for paper
towels.
The Strategic Communication manager noted
that there was not yet any information available from the advertising agency about
the quality of
the creative material or the media schedules to be used in the upcoming quarter.
In preparation for this task, the Strategic
Communication manager decided to follow this procedure (which you should follow to complete this assignment):
A. A scatterplot (a pictorial representation of the
response function) would be constructed to show the general shape of the
response function.
B. Using the adv/sales data for the previous 30 quarters, a time-series
analysis would be conducted to estimate the parameters of a response function.
C. A net profit function would be set up which
would utilize the function developed in B. above.
D. The sales/gross profit/net profit function system set up in C. above would
be installed online using the Java programming language (Java applet format) in one self-contained program.
E. A numerical evaluation would be conducted using
the model to find an advertising expenditure which would be expected to yield a reasonable net profit for spring 2008.
F. A break-even analysis would then be conducted using the advertising figure
generated by the use of the computer model in E. above.
G. The Integrated Promotion manager would then develop a
report to
be sent to top management which would contain the recommendation as to how
much Wilmore should spend on advertising during the Spring of 2008 on paper towels as well as a
description of the analyses utilized to arrive at this recommendation.