Should you invest or disinvest in advertising campaigns?

Formulation of the problem

The decision alternatives here are whether to launch an advertising campaign or not.

Classification based on relevance

An advertising campaign has two distinct effects: a certain increase in discretionary fixed costs and a desired increase in volumes. There is therefore a volume impact increasing profit and a fixed cost impact decreasing it.

Net Economic Impact and indifference points

For this exercise, you can download here data and solutions if you did not already. Try to compute the net economic impact and the indifference point in volume change (\(\Delta Q\)), and in fixed cost change (\(\Delta FC\)) assuming you completely stop advertising for Cosmo, thus avoiding 1,000 in advertising costs. However, this results in a decrease in the demand for Cosmo of 500 units (the other products are not affected). Here again, these impacts can be represented with the following equation:

\[ \begin{aligned} NEI & = + \Delta Q \times UCM_B && - \Delta FC \\ & = + (Q_A - Q_B) \times (P_B - V_{cB}) && - \Delta FC \end{aligned} \]

Qualitative factors

Advertising has some immediate impact on sales but may also have more lasting effect through the image of the brand.

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