Marketing 13th Edition by Gary Armstrong, Philip Kotler

Exercise 3

Using the percent-of-sales method, an advertiser sets its advertising budget at a certain percentage of current or forecasted sales. However, determining what percentage to use is not always clear. Many marketers look at industry averages and competitor spending for comparisons. Web sites and trade publications publish data regarding industry averages to guide marketers in setting the percentage to use. For example, firms competing in the toy and apparel industries spend 10 percent or more of sales on advertising, whereas firms competing in the mortgage servicing and insulation industries spend less than 1 percent of sales on advertising. You read about GEICO at the beginning of the chapter. It is the number-two auto in-surer with $17 billion in revenue last year. It spent $1.1 billion on advertising that year and plans to continue spending the same percentage of sales on advertising next year. The aver-age advertising-to-sales ratio for the insurance industry is 0.1 percent of sales.
If GEICO projects $19 billion in sales next year, using the percentage-of-sales method of advertising budgeting, how much will the company budget for advertising if basing it on projected sales? (AACSB: Communication; Analytical Reasoning; Reflective Thinking)