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.

Question 1.

AdCreate has negotiated a rate of 12.5% for a commission system payment, with Worry Free Financial for a campaign in 2022. AdCreate arranged for airing three ads, during Newshour on CNN, in the first week of the launch campaign. AdCreate's income for these three ads in the first week was $49,375. Based on this information, which of the following is true?

The client (Worry Free Financial) paid AdCreate $425,625 for the three ads

AdCreate paid CNN $425,625 for the three ads

AdCreate paid CNN $345,625 for the three ads

Question 2.

Under the cost-plus agreement that AdCreate has with its client Still Water Furnishings, Jacob Stein noticed that AdCreate incurred costs of $625,000 for a print and direct mail campaign during 2022. Under the cost-plus terms, AdCreate used a mark up of 13% for services provided to Still Water Furnishings. Based on this information, which of the following is true?

The client (Still Water Furnishings) paid AdCreate $706,250 in 2022

AdCreate's income from the Still Water Furnishings account in 2022 was $81,250

The client (Still Water Furnishings) paid AdCreate $700,000 in 2022

Question 3.

In reviewing the incentive-based agreement between AdCreate and Anchor Motors, Jacob Stein found that sales of Anchor rose 5.2% compared to the previous year in the second quarter. AdCreate paid the media $895,000 for Anchor Motors ads during the same period. Based on this information, which of the following is true for the second quarter billings?

AdCreate billed Anchor Motors $1,152,941 for the second quarter in 2022

AdCreate's income from the Anchor Motors account for the second quarter of 2022 was $257,941

AdCreate billed Anchor Motors $1,052,941 for the second quarter in 2022

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

Question 5.

In reviewing the percentage charges agreement between AdCreate and Globe Travel Adventures, Jacob Stein found that AdCreate paid a printing firm $220,000 for a direct mail brochure for Globe Travel Adventures in 2022. Based on this information, which of the following is true?

AdCreate's income from Globe Travel Adventures in 202 was $28,830

The mark up of 17.65% of the cost amounts to a 15% commission

AdCreate billed Anchor Motors $258,830 in 2022