Introduction
Advertising is part of the sales and marketing effort. Thus, it is essential to analyze money spent on advertising to keep the advertising budget in line with promotional as well as marketing goals. Advertising expenditure is seen as an investment in building up a firm, company or business. Thus, businesses ought to consider their expenditure on advertising as an overhead expenditure. This paper will delve at analyzing the advertising expenditure of a company. Specifically, the paper will determine the relationship between a company’s advertising expenditure and total sales. Data obtained from the company will be used to generate a scatter diagram and a linear regression. A line of best fit will be added to the scatter plot to determine the intercepts as well as the relationship between advertising expenditure (A) and total sales (S). The relationship obtained will then be used to predict sales for specific advertising expenditure.
Analysis
The table below (Table 1) shows the advertising expenditure (A) in thousands of dollars and total sales (S) in thousands of dollars of a given company. A closer look at the data shows a linear relationship between A and S. In other words, the total sales of the firm increases with increase in the advertising expenditure.
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|
Advertising Expenditure (A) |
Total Sales (S) |
|
36 |
335 |
|
37.5 |
341 |
|
38 |
342 |
|
38 |
342 |
|
41 |
345 |
|
42 |
350.2 |
|
43 |
360 |
Table 1: Advertising expenditure (A) and Total Sales (S) of a Company.
The above data is plotted on a scatter diagram and the scatter plot obtained is as shown below.
The data was plotted in excel and the trend line obtained is as displayed in the chart above. The equation of the line is;
The equation shows that there is a linear relationship between advertising expenditure and total sales. “A linear relationship is a statistical term used to describe a straight-line relationship between a variable and a constant” (Hayes, 2019). The linear relationship can either be graphically presented or presented using a mathematical equation.
From the equation;
Also,
The equation obtained can be used to predict the total sales if the advertising expenditure is given and vice versa.
If the advertising expenditure is $48,000, the total sales of the company are calculated as shown below;
However, we have to consider that the sales are in terms of thousands of dollars. Therefore;
Therefore, the total sales will be $369,586.4 if the advertising expenditure is $48,000.
Conclusion
To sum up, it is essential to analyze a company’s advertising expenditure. This is because it helps a company in the decision making process. For the company’s data analyzed above, there is a linear relationship between advertising expenditure and total sales. The company increases its sales if the advertising expenditure is increased. The company can use this linear relationship to predict its total sales for a given expenditure. By increasing its brand awareness, the company can generate more profits.
References
Hayes, A. (2019). Linear Relationship Definition. [Online]. Available at: https://www.investopedia.com/terms/l/linearrelationship.asp . Accessed 28h April 2019.
