GEICO, the number-two auto insurer with $18 billion in revenue last year, spent $0.9 billion on advertising that year and plans to continue spending the same percentage of sales on advertising next year. The average advertising-to-sales ratio for the insurance industry is 0.2 percent of sales. If GEICO projects $20 billion in sales next year, using the percentage-of-sales method of advertising budgeting, how much will the company budget for advertising if basing it on projected sales?

The budget for advertising for the next year will be $1 billion.

Explanation:

Based on the information given in the question, the advertising to sales ratio for GEICO based on its last year data is,

Advertising to sales = Advertising / Sales Revenue

Advertising to sales = 0.9 / 18   =  0.05 or 5%

The advertising to sales ratio for GEICO is much higher than the industry average. If GEICO continues to maintain this ratio for the next year, the budget for advertising will be,

Advertising budget = 20 * 5%   =  $1 billion

If it uses the industry average ratio, the budget will be,

Advertising budget = 20 * 0.2%  = $0.04 billion

As GEICO is expected to maintain its own advertising to sales ratio, the correct answer for advertising budget us $1 billion