ASSESSING THE RELATIONSHIP BETWEEN SALES REVENUES AND ADVERTISING EXPENDITURES BY REGRESSION ANALYSIS
The purpose of this report is to develop an assessment of the relationship between sales revenues and advertising expenditures through the application of regression analysis to relevant data. The results of the assessment are presented in (a) a statement of the business problem and presentation of the data; (b) the results of the regression analysis; and (c) an interpretation of the results of the regression analysis and a statement of the significance of the findings for the organization.
Statement of the Business Problem and Presentation of the Data
The manufacturer and marketer of a personal care product line had experienced a downward trend in sales revenues. There was an accompanying pressure on operating profits, which resulted in cost reduction measures. One of the areas hit by cost cutting was advertising for the product line.
Disagreement existed within the product management team about the wisdom of reducing advertising expenditures as a proportion of sales revenues. One faction argued that increased advertising would boost sales revenues and profits. The opposing faction argued that costs had to be reduced to restore profitability soon and that, as advertising was a major cost area, it could not escape the cost reduction effort.
A decision was made to assess the relationship between sales revenues and advertising for the personal care product line by applying regression analysis to the data. Data for a four-year period were collected and stated in quarterly form. The data are presented in Table 1.
Table 1: Sales Revenues and Advertising Expenditures