A Co. is planning a marketing strategy to increase its sales of product. The marketing director, suggests that the company gives its customers one free product when they buy 10 products at regular prices. Customers will be given a pocket card that will be punched each time they buy a product. They can turn in their card after ten punches to receive a free product of their choice. The marketing director believes that the company should run this promotion campaign for 3 years to get maximum customer attention and increased sales.
The CEO of the company is not sure on the accounting procedures for the new marketing plan. He realizes that the company will be incurring costs each time a free pretzel is given but there will be no revenue or cash inflow. He decides to call his CFO to understand the appropriate accounting treatment for the new marketing plan.
How would the CFO explain to the CEO why the marketing director favors this promotion and why it would affect the revenue and cashflow?
Thank you in advance.:)
