Question

You are the manager in charge of global operations at Bank Global- a large commercial bank that operates in a number of countries around the world. You must decide whether or not to launch a new advertising campaign in the U.S. market. Your accounting department has provided the accompanying statement, which summarizes the financial impact of the advertising campaign on U.S. operations. In addition received a call from a colleague in charge of foreign operations, and she indicated that her unit would lose $8 million if the U.S. advertising campaign were launched. Your goal is to maximize Bank Global ’s value. Should you launch the new campaign? Explain.

Short answer

The new advertising should be launched.

Step-by-step solution

Introduction

To know whether the manager will launch a new advertising campaign, eliminate the incremental revenue and cost of launching the new campaigns to identify the point at which profit is maximized. At the same time, the direct and indirect fixed costs will stay the same regardless of whether the new campaign will be launched or not.

Launching the new campaign,

To get the total incremental cost and revenue, using the given chart, subtract the revenues and costs of the pre-advertising campaign and the post-advertising campaign, as follows:

Total revenues = revenues and costs of pre advertising campaign – revenues and costs of post advertising campaign

$\begin{array}{l}=\$31,980,200-\$18,610,900\\ =\$13,369,300\end{array}$

To get the incremental cost that needs to be spent for the TV airtime, subtract the TV airtime of the pre advertising campaign and the post advertising campaign, as follows:

Incremental cost = cost of TV airtime for the pre advertising campaign – cost of TV airtime for the post advertising campaign.

$\begin{array}{l}=\$8,610,400-\$5,750,350\\ =\$2,860,050\end{array}$

An additional of $2,860,050 is needed to be spent on TV airtime, as shown in table.

To get the incremental cost that needs to be spent for the ad development labor of the pre advertising campaign and post advertising campaign,

Incremental cost = cost of Ad development labor for the pre advertising campaign – cost of Ad development labor for the post advertising campaign.

$\begin{array}{l}=\$3,102,450-\$1,960,580\\ =\$1,141,870\end{array}$

An additional $1,141,870 is needed to be spent on ad development labor.

To find the total incremental variable cost:

Total incremental cost = incremental cost of TV airtime + incremental cost of Ad development labor.

$\begin{array}{l}=\$2,860,050+\$1,141,870\\ =\$4,001,920\end{array}$

To find the total incremental cost of launching the campaign, add the amount of the loss of foreign operations unit that costs $8,000,000 to the total incremental variable cost, that costs $4,001,920, as follows:

Total incremental cost = total incremental variable cost + loss of foreign operations unit

$\begin{array}{l}=\$4,001,920+\$8,000,000\\ =\$12,001,920\end{array}$

The total incremental cost is $12,001,920.

Since the total incremental revenues that cost $13,369,300 is greater than the total incremental costs that costs $12,001,920, the new advertising should be launched with an additional of $1,367,380 in the profits of the bank.