Introduction advertising unit Structure

Table 1 : Effect of Advertising on Production Cost 
Particulars
Before Advertising After Advertising 
Units Produced 
2,000 
4,000 
Advertising Expenses 
Nil
1,000 
(a) Material Costs 
1,200 
500 
(b) Labour Costs 
500 
700 
(c) Overhead Costs 
300 
600 
Total Cost of Production
2,000 
2,800 
Per Unit Cost
Re. 1 = 00 
Re. 0 = 80 
Advertising increases sales which in turn demand large scale 
production, thereby ensuring the benefits of economies of scale. 
Further advertising expenditure do not constitute a part of 
production cost, it will never increase the cost of production. 
However, advertising can indirectly bring down the cost of 
production capacity, provided advertising generates demand upto 
the level of optimum production capacity. 
The volume-cost-price relationship is quite complex and there 
is no proof of what advertising does to a manufacturer‟s cost of 
production. Advertising lowers total costs for some, increases total 
costs for others. Advertising can help reduce per unit production 
costs for certain manufacturers operating below plant capacity. 
Total unit costs can be lower with heavy advertising than without it. 
8.3 EFFECTS OF ADVERTISING ON DISTRIBUTION 
COSTS
Advertising is generally believed to increase the overall 
distribution costs. Distribution cost includes advertising and sales 
promotion costs such as display, demonstration, dealers‟ 
commission and incentives etc. Since advertising expense is a part 
of selling it will naturally add to the total selling and distribution 
costs. Increase in advertising costs may not result into 
proportionate increase in distribution costs, Sometimes, advertising 
may reduce the distribution costs for the manufacturer, because 
effective advertising cuts down the expenditure on personal selling, 
thus making substantial savings in selling costs. Suppose a 
business firm distributes 2000 units per month. The total distribution 
cost inclusive salary to salesman and other distribution expenses 
amounting to Rs. 1000. In this case the distribution cost per unit is 

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Rs.0.50 before advertising. However, to distribute another 2000 
units, an expenditure of Rs. 1600 is incurred after the product is 
advertised. Here distribution cost per unit is Rs.0.40. It can be 
concluded that the distribution cost per unit is reduced from Rs.0.50 
to Rs.0.40. This is illustrated is Table 2.