Case Study - Hula Island: Strategic Decisions Involving Costs and Benefits of InternetAdvertising Programs
Answer the six discussion questions at the end of the case study thoroughly and add in references when applicable:
Questions - Prepare a report to the Chief Coconut of Hula Island that discusses the following:
1. Recall that Hula's management believes that each customer generates $3.50 in short-run profit and $25 in lifetime profit. Calculate the advertising cost per conversion for Internet advertising Options 1 (Monthly Online Magazine) and 2 (Affiliated Retail Store). Calculate the total expected profit from each option (short-run and lifetime), as well as the ratio of total profit to advertising cost (short-run and lifetime). To determine the benefits of an advertising campaign, should Hula Island use the profit on the first sale or the expected lifetime profits? To choose between advertising campaigns, should Hula Island use the total expected profits or the ratio of total expected profits to advertising costs?
2. Using your answer from Question 1 (either short-run or lifetime, total expected profits, or the ratio of total expected profits to advertising costs), determine the winner of the comparison between Options 1 and 2. Advertising Option 3 is different from the other two options in that the auction determines the fixed advertising cost. Assume Hula wins the search engine auction with a bid of $105. Which advertising option (1, 2, or 3) would you recommend to management?
3. Create a cash budget for Hula Island on a monthly basis for the period June 2014 through May 2015. Perform the calculations on an incremental basis (i.e., determine the increase or decrease in cash for each month). The following information will allow you to structure the cash budget: The cash coming in each month is approximately one-half of the current month's sales and one-half of the previous month's sales. The cash out for each month has several parts. Each month Hula pays cash for invoices approximately equal to the cost of products sold in the prior month. Rent of $2,000 is a fixed cost paid during the same month it is incurred. Variable costs are paid each month. They consist of part-time labor costs that average $1.25 per order and shipping and taxes that average $4.10 per order. Finally, the owner takes $2,000 a month as a personal distribution.
4. Although Hula Island is profitable on an annual basis, the company has a very tight budget and a small margin for error. The owner is always concerned about being able to pay his monthly bills. Should the focus of the analysis be accrual accounting, or should it shift to cash accounting?
5. Hula Island will only pay for an advertising campaign out of current cash. Given your understanding of Hula's market, when would be the best time to conduct a single advertising campaign? Why?
6. Should Hula Island run multiple advertising campaigns of potentially different types over the course of a year? Why or why not?
Attachment:- Hula Island Case Study.rar