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Case 8: Kuhlman’s Department Store Media Problem
The estimated cost of goods sold as a percentage of sales
Other operating expenses, exclusive of the advertising expenses
The current corporate income tax rate
Your Solver model will calculate the total advertising expenses for any or all of the six media evaluated,
the number of customers you expect from the advertising media selected, the expected sales from those
customers, and the cost of goods sold from the expected sales. You will use the results of these calculations to
create an income statement that ends with net income after taxes; the Solver model will optimize this cell.
Advertising Media Considered
For the purposes of this case, the types of advertising media and their cost structures are greatly simplified. In
actual practice, the pricing schedules for each type of advertising vary depending on the amount of
advertising purchased, the dates and times that TV or radio commercials air and that newspaper ads run, the size and
placement of newspaper and magazine ads, and the pricing structure and search engines offered for Internet
ads. You can leave those decisions to the marketing consultants.
This section briefly describes each type of marketing medium under consideration:
An increasingly popular method of attracting new customers, Internet ads target
e-commerce customers, but they can also attract customers to
stores as well.
The power of Internet ads is that they can be linked to popular Web search engines such as
Google, Yahoo, and Bing!, generating millions of contacts or
brick and mortar
The pricing structure for
Internet ads is highly variable
in which a
company pays pennies or even fractions of a penny to a Web advertiser for each Web user who
clicks the advertisement link.
the pricing selected for this case is
pay per click,
Since their integration into American culture more than 60 years ago, television
commercials have become the predominant marketing medium. The combination of moving
picture and audio can convey a powerful message to potential buyers. Although television
commercials can be expensive to produce and air, and the message is brief (a 30-second Super
Bowl ad costs $2.5 million!), the cost per potential customer contacted is reasonable.
What radio commercials lack in visual impact, they make up for in portability. A large
proportion of the working population listens to radio in cars during the daily commute to and
from work. An additional appeal of radio is that listeners tend to be loyal to one or two local
stations rather than
as television viewers do. Radio ads cost less to produce
and air than television advertising.
The oldest of the marketing media, newspaper ads offer visual impact while
allowing readers unlimited time to peruse the ad. The emergence of modern media and changing
demographics in America have degraded the media value of many newspapers to the point that
they are now largely collections of advertisements with surprisingly little news. Despite this
decline, a large proportion of older Americans (who are also loyal department store customers)
continue to read newspapers. By purchasing ads in the local newspapers, Kuhlman
s has been
targeting its traditional customer base.
The advantages and disadvantages of newspaper advertising also apply to
magazine ads. One exception is that topical magazines offer targeted audiences to businesses
offering specific products. For example, fashion magazines feature clothing ads, and
magazines are filled with home improvement ads. Although it would make no sense for
a local department store to advertise in a national magazine, Kuhlman
s could choose to buy ads
in a local magazine.
advantage of sending direct mail such as catalogs is that a company can target its existing
customer base for repeat sales and display a larger selection of merchandise in its mailer. Of all
the advertising media, direct mail has the highest cost per customer contacted, largely due to
postage. The bulk of Kuhlman
Despite growing dissatisfaction among consumers with
s past advertising budgets has been spent on direct mail.