Scenario 17.2 Use the following to answer the questions.
The State Farm Group includes several companies. Probably the most well-known company in the group is the State Farm Insurance company, the largest auto and home insurer in the United States. State Farm Insurance provides protection for approximately 78 million policies on auto, fire, life, and health services. It is also a leading insurer of homes and autos in Canada. Another company in the State Farm group is the State Farm Bank, which was opened in 2000, beginning State Farm's entry into the financial services field. However, the State Farm Bank is not a traditional bank, in that it has no branch offices and its services are provided through State Farm agents, a call center, the mail, and on the Internet. It currently serves over 1.9 million bank accounts.
Refer to Scenario 17.2. If State Farm were to decide that its previous method of appropriating the advertising budget was ineffective, it could decide to allocate 2% of its total annual sales to advertising. However, one problem with this method is that
A) it makes the bookkeeping too difficult.
B) it is tied too closely to sales forecasts.
C) a sales decline leads to an increase in the advertising appropriation.
D) a drop in sales would cause a drop in the advertising budget.
E) competitors may have different advertising objectives.

Question

Quizplus · Accepted Answer

Allocating a fixed percentage of sales to advertising means that if sales decrease, the advertising budget would also decrease, potentially limiting the company's ability to recover or grow sales through advertising.