As product-managing manager, we are responsible for the profit from the products that we manage.

There are lot of factors that goes into the cost of the product, including the advertising budget.

Last year’s advertising budget of $40,000 was spent in equal increments over the four quarters. Initial
expectations are that we will repeat this plan for the coming year.

Our product sells for $40 and costs us $25 to produce. Sales in the past have been seasonal, and our
consultants have estimated seasonal adjustment factors for unit sales as follows:

Q1 90%, Q2 110% Q3 80% Q4 120%

(A seasonal adjustment factor measures the percentage of average quarterly demand experienced in a
given quarter)

In addition to production costs, we must take into account the cost of the sales force (projected to be
$34,000 over the year, allocated as follows; Q1 and Q2 $8,000 each, Q3 and Q4 $9,000 each), the cost of
advertising itself, and overhead (typically about 15% of the revenue)

Quarterly unit sales seem to run around 4,000 units when advertising is around $10,000. Clearly,
advertising will increase sales, but there are limit to its impact. Our consultants several years ago
estimated the relationship between advertising and sales. Converting that relationship to current
conditions gives the following formula

𝑈𝑛𝑖𝑡 𝑆𝑎𝑙𝑒𝑠 = 35 × 𝑠𝑒𝑎𝑠𝑜𝑛𝑎𝑙 𝑓𝑎𝑐𝑡𝑜𝑟 × √(3,000 + 𝑎𝑑𝑣𝑒𝑟𝑡𝑖𝑠𝑖𝑛𝑔)

We would like to see the variation of profit against different values of production cost (in the range $20
to $30) and selling price (in the range $35 to $45). Calculate this variation of profit using spreadsheet as
the tool.

(Adapted from: Powell, Baker, Management Science – The Art of Modeling with Spreadsheets (2e), Wiley
India)