An advertising agency, Round Ltd, incurred the following expenses during an adve

Question

An advertising agency, Round Ltd, incurred the following expenses during an advertising campaign for Nando’s:

Primary research costs (outsourced to Mean Research) – $10 000

Secondary research costs – 5 hours (strategist)

Flyers:

Design – 4 hours (artist)

Printing/production (outsourced to Align Printers) – 8 000 @ R2 each

Distribution (outsourced to Fast Couriers) – 8 000 @ $0.50 each

In-store display:

Design – 7 hours (artist)

Printing/production (outsourced to Align Printers) – $7 000

Delivery and set-up (outsourced to Fast Couriers) – $2 000

In-store promotion:

Promoters – (outsourced to Talent Ltd) – 2 @ $500 each per day for 5 Saturdays

Uniforms – 2 @ $500 each

Promotional items (fruit juice) – 120 boxes at $25 each

Prizes (provided by Nando’s) – $15 000

Magazine:

Design – 10 hours (artist)

Copy – 5 hours (copywriter)

Production (outsourced to Align Printers) – $7 500

1 DPS colour @ $50 000 in Dough magazine (a weekly publication) for 5 weeks

Administration costs – $8 000

All prices exclude VAT (14%), the agency is VAT registered and the standard commission is applicable to media. Round off to the nearest Dollar where applicable and show all calculations.

1.1       Calculate the complete budget if the agency uses the fee-commission combination and charges a fee of $75 000.   

1.2 Round Ltd places a 20% mark-up on research, 15% on printing/production costs and 10% on other outsourced expenses. Nando’s asked for a 6% kickback from the media. The media gave a 5% cash discount for early payment, but the agency kept the cash discount.

1.2.1 Calculate the budget for Nando’s if Round Ltd uses the negotiated commission system.  

1.2.2 Which system is preferable to the Nando’s, the fee-commission combination or the negotiated commission system? Prove your answer by calculating the difference between the two remuneration systems.

1.3 Round Ltd places a 20% mark-up on all costs and staff time is charged at a flat rate of $350 per hour. Nando’s asked for a 10% kickback from the media.

Calculate the complete budget for Nando’s if Round Ltd uses the cost-plus system.   

Explanation / Answer

Particulars Amount ($) Remarks Commission Charged (A)           75,000 As Provided Primary research cost           10,000 As Provided Secondary research cost              1,750 5*350 Flyers: Design              1,400 4*350 Printing/production           16,000 8000*2 Distribution              4,000 8000*0.5 In-Store display: Design              2,450 7*350 Printing/production              7,000 As Provided Distribution              2,000 As Provided In-Store promotion: Promoters              5,000 2*500*5 Uniforms              1,000 2*500 Promotional Items              3,000 120*25 Prizes                     -   Not Provided Magazine: Design              3,500 10*350 Copy              1,750 5*350 Production              7,500 As Provided DPS Colour           50,000 As Provided Administrative Costs              8,000 Total Costs (B)        1,24,350 Profit/(loss)   [A-B] -$      49,350

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