The Eldave Advertising Agency has been working on a campaign for Greenpoint Leisure Limited for the last four months. The campaign is for Greenpoint’s eco-friendly holidays in South America and uses both TV and Sunday-paper magazines. The adverts have almost been completed and the campaign launch date is in six weeks’ time. The estimated cost of completion is £2,400 (two people @ £400/week for three weeks). Greenpoint has signed a contract to pay Eldave £50,000 (for advert production) plus media space at cost. Eldave has just received a letter from a firm of solicitors stating that Greenpoint has ceased trading with immediate effect and that its creditors are unlikely to receive any of the money they are owed. Fortunately, Eldave has received a non-returnable deposit of £25,000 (50% of the production fee) from Greenpoint but a summary of its account reveals an overall balance owing of £61,000 for work to date. This includes a general fixed overheads charge of £6,000 apportioned on the basis of total direct cost. In order to minimize Eldave’s losses, Eloise Thompson, the partner in charge of the Greenpoint account, has contacted three other travel firms specializing in the South American market. She has shown them the adverts and tried to persuade them to take over the work-in-progress for the special price of £25,000. One of these three, Trek Hols Limited, has offered £12,000 for the appropriately modified and completed adverts on condition that the campaign starts in two weeks’ time. Eldave has provisionally booked advertising space for eight consecutive weeks starting in six weeks’ time. The cost of this is £30,000 a week, for which it has paid £12,000 (a 5% non-returnable deposit included in the £61,000). It has also booked a one-quarter-page colour space in the Independent on Sunday magazine for the same eight weeks. Each of these spaces costs £9,000 but, although a contract has been signed, no money has yet been paid (not included in the £61,000). The contract allows for a 50% reduction if cancellation occurs less than four weeks before publication. This reduction increases to 75% if cancellation occurs more than four weeks before publication. Although Trek Hols is happy to take over Greenpoint’s media slots, it also wants the same weekly coverage for the four weeks immediately prior to the original launch date. Trek Hols insists the campaign must start in two weeks’ time and agrees to pay for all the media space in full, at cost.
In order to complete the adverts for launch in two weeks’ time, Eldave will have to redeploy two of its employees (gross pay £400 a week each) for one and a half weeks, at the end of which the adverts will be delivered to the media. As a result of this, the job these two are currently doing will be one and a half weeks late and Eldave will incur a fi nancial penalty of ‘£1,000 a week or part-week’.

Tasks:
Identify the relevant costs and income and advise Eldave as to whether it should accept Trek Hols’ offer. Your calculations must clearly show the reasons why each of the above items has been included or excluded. State any assumptions that you make.