Hula Island is a Boutique Internet Shop that specializes in hand-painted glassware and Hawaiian-themed products. The company is a pure Internet shop without any brick-and-mortar stores. Internet advertising services offer Hula a variety of options, each with different pricing structures and outcomes. Management must use its resources wisely to generate sales, earnings, and cash flow. Students use their knowledge of Cost-Volume-Profit (CVP) relationships to make advertising decisions that affect short- and long-run profitability. Students then prepare cash budgets to support the timing of their advertising decisions.

Hulas management believes that each customer generates $3.50 in short-run profit and $25 in lifetime profit. Calculate the advertising cost per conversion for Internet advertising Options 1 (Monthly Online Magazine) and 2 (Affiliated Retail Store). Calculate the total expected profit from each option (short-run and lifetime), as well as the ratio of total profit to advertising cost (short-run and lifetime). To determine the benefits of an advertising campaign, should Hula Island use the profit on the first sale or the expected lifetime profits? To choose between advertising campaigns, should Hula Island use the total expected profits or the ratio of total expected profits to advertising costs?

Note: Case Hula Island is from the IMA Case Studies Journal

Table 2: Costs and Predicted Outcomes for each Advertising Option

Costs Opt. 1 Mon. Online Magazine Opt.2 Affiliated Retail Store Opt. 3 Search Engine Variable $0.00 $0.25/click $0.005/click

Fixed $500 $50 Auction

Outcomes

Expected Clicks 1,550 5,780 84,000

Average Pg. views 20 5 1.5

% of Clicks Converted 7.00% 3.00% 0.14%