AdCreate's Client Portfolio

Read the overview below and complete the activities that follow.

AdCreate is a full-service advertising agency with several high-profile marketing firms as clients. Given their vast client list and the varied services they provide to different clients, they are compensated differently by different clients. Jacob Stein, who recently joined AdCreate in the finance department, was asked to review the various compensation models being used by some of AdCreate's biggest clients.

CONCEPT REVIEW: The type and amount of services an ad agency performs vary from one client to another. As a result, agencies use a variety of methods to get paid for their services. Agencies are typically compensated in three ways: commissions, some type of fee arrangement, or percentage charges.

Case Analysis

Agency Compensation Methods

Read the report below, which provides a summary of AdCreate's compensation agreements with four of its major clients, and answer the questions that follow. NOTE: There may be more than one answer to each question. You MUST list all potential answers for full marks.

AdCreate has a negotiated commission system agreement with Worry Free Financial. Worry Free Financial advertises on T.V. mainly, and has the following sliding scale for media commissions in its agreement with AdCreate: 15% commission for media expenditures of less than $ 300,000, 12.5% commission for media expenditures between $ 300,000 and $ 400,000 and 10% commission for media expenditures above $ 500,000.

AdCreate has a cost-plus agreement with Still Water Furnishings. Under the cost-plus terms, AdCreate uses a mark up of 13% for services provided to Still Water Furnishings.

With Anchor Motors, AdCreate has an incentive-based agreement. Under the terms of this agreement, AdCreate gets to keep the full 15% commission from media if Anchor Motor's sales for the period of advertising show an increase of 5% or greater compared to sales in the same period the previous year. For sales increase between 3% and 5%, AdCreate gets to keep 13% out of the 15% media commission. Finally, for sales increase between 1% and 3%, AdCreate gets to keep 10% out of the 15% media commission.

AdCreate has a percentage charges agreement with Globe Travel Adventures. Under these terms, AdCreate charges a mark up of 17.65% on services from outside providers like printers, photographers, etc.

Show your work

Question 4.

In reviewing the agreement between AdCreate and Anchor Motors, Jacob Stein found that sales of Anchor rose 2.8% compared to the previous year in the third quarter. AdCreate paid the media $450,000 for Anchor Motors ads during the same period. Based on this information, which of the following is true for the third quarter billings?

AdCreate billed Anchor Motors $502,941 for the third quarter in 2022

AdCreate's income from the Anchor Motors account for the third quarter of 2022 was $79,412

AdCreate billed Anchor Motors $529,412 for the third quarter in 2022