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Marginal Return to Sales

Group Project #1
GROUP 1: Deanne Giles, Mohammad Safi, Rob Halgren, Raul Elias 6/27/2012

Introduction
We finished our analysis of the effectiveness of television advertising and other promotions on sales of a special tire. We attempted to fit data the company had gathered into the equations given, and provide an analysis of marginal return to sales and advertising. S is sales revenue in millions of dollars, x is millions of dollars spent on television advertising, y is millions of dollars spent on other promotions, then we can think of revenue as a function of cost. The company wants to know how to make the best use of its advertising dollars in the Regions 1 and 2 and whether the current allocation could be improved. We can advise management about current advertising effectiveness, allocation of additional expenditures, and reallocation of current advertising expenditures. These are the functions provided:
S = a0 + a1x + a2x2 + b1y REGION 1: S2 = 30 + 20x - 0.4x^2 + B1 REGION 2: S2 = 20 + 36x - 1.3x^2 + B2
or or

To achieve these goals, they asked us to complete the following steps: 1. In the analysis of sales and advertising, marginal return to sales is usually used, and it is given by dS1/dx for Region 1 and dS2/dx for Region 2. (a) Find and dS1/dx and dS2/dx. (b) If $10 million is being spent on TV advertising in each region, what is the marginal return to sales in each region? 2. Which region would benefit more from additional advertising expenditure, if $10 million is currently being spent in each region? 3. If any additional money is made available for advertising, in which region should it be spent? 4. How could money already being spent be reallocated to produce more sales revenue?

Analysis
Through our analysis we were able to give the company the following answers to their questions: 1) Regional Derivatives a) dS1/dx = 20 -.8(x) dS2/dx = 36 - 2.6(x) b) If $10 million is being spent on TV advertising in each region, what is the marginal return to sales in each region? dS1/dx = 20 -.8(10) = 12 (in terms of millions of dollars) dS2/dx = 36 - 2.6(10) = 10 (in terms of millions of dollars) 2) Which region would benefit more from additional advertising expenditure, if $10 million is currently being spent in each region? The region that would benefit more from additional advertising expenditure is Region 1 because the gains still occur up until 25 million dollars, while Region 2 gains stop at 13.8 million. Region 2 benefits more than Region 1 up until 9 million dollars spent. After 9 million any additional advertizing expenses should be directed towards Region 1 because the marginal return of sales would be greater in Region 1 than Region 2. This would generate better results. To get these results we evaluated the derivative graphically using the relative maximum for each region (see figure 1.1). The second derivative of each function is negative which proves that there is a maximum profit function for the marginal return of sales. This helps us find how much money is spent to get a positive marginal return of sales on each region.

Figure 1.1 3) If any additional money is made available for advertising, in which region should it be spent? Any additional money made available should be divided and spent amongst both Regions. This would help maintain a positive marginal return to sales for both Regions. Region 1 would never

want to spend more than 25 million in advertising due to negative marginal return to sales that would occur at that point. Region 2 should not spend more than 13.8 million because marginal return to sales will be negative. So we could give region 1 up to 25 million to spend on advertising and region 2 up to 13.8 million. 4) How could money already being spent be reallocated to produce more sales revenue? To get these results we evaluated the functions graphically for each region and used the table function on our calculator to evaluate how to produce more sales revenue (see figure 1.2). Using our table function in our calculator we can see that marginal returns to sales is greater for region 2 up until 9 million dollars. After 9 million dollars marginal return to sales is greater for region 1. We should reallocate the money that is already being spent by taking away 1 million dollars in advertising expenditures from region 2 and give it to region 1. Hence, we will have 11 million being spent in region 1 and 9 million being spent in region 2.

figure 1.2

Conclusion
When spending 10 million dollars in advertising expenditures, marginal returns to sales for region 1 is 12 million and region 2 is 10 million. When we maximize marginal returns to sales we find that we can spend up to 25 million in region 1 and up to 13.8 million in region 2. If we spend more than that amount on advertising, then marginal returns to sales will be negative. The company will never want to spend more than 25 million in region 1 and never more than 13.8 million in region 2. We suggest that the company provides 15 million more to region 1 for advertising and 3.8 million more to region 2. This way we can maximize marginal returns to sales in both regions.

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