Two Companies Are About to Make a Decision Regarding an Investment

question 26

Essay

Two companies are about to make a decision regarding an investment in a new promotional campaign. Company A will either advertise in all media or advertise in newspapers only. Company B will either run a sweepstake or run a big sale. The payoff matrix is shown below. $\begin{array} { l l c c } \hline && { \text { Company B } } \\&& \mathrm { B } _ { 1 } : \text { Run a } & \mathrm { B } _ { 2 } : \text { Run a } \\&& \text { sweepstakes } & \text { big sale } \\\hline & \begin{array} { l } \text { A1: Advertise } \\\text { in all media }\end{array} & 4 &-1 \\\text { Company A } & \begin{array} { l } \text { A2: Advertise } \\\text { in newspapers only }\end{array} & - 2 & 1 \\\hline\end{array}$

Determine the proportion of time that each company should employ each strategy.

---

Definitions:

Net Operating Income

An essential metric showing the profitability of a company's core business activities, excluding the effects of financing and investment income.

Variable Cost

Expenses that change in proportion to the amount of goods or services produced.

Advertising

The action of calling public attention to products, services, or events, typically through paid announcements in various media platforms.

Margin Of Safety

It represents the difference between actual or budgeted sales and the break-even point. It indicates how much sales can fall before a business incurs a loss.