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Profitability Analysis CONTRIBUTION MARGIN (COST VOLUME PROFIT) CHAPTER 6

Profitability Analysis CONTRIBUTION MARGIN (COST VOLUME PROFIT) CHAPTER 6. marketing costs money BA 315- MARKETING MANAGEMENT (L.P. CHEW).

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Profitability Analysis CONTRIBUTION MARGIN (COST VOLUME PROFIT) CHAPTER 6

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  1. Profitability AnalysisCONTRIBUTION MARGIN (COST VOLUME PROFIT)CHAPTER 6 marketing costs money BA 315- MARKETING MANAGEMENT (L.P. CHEW)

  2. Profitability analysis is the assessment of the impact of various marketing strategies and programs on the profit contribution that can be expected from a product or product line. • Variable costs vary with sales volume, whereas fixed costs remain the same regardless of volume levels.

  3. The percentage variablecontribution margin indicates thepercentage of each additional sales dollar that will heavailable to help the firm cover its fixed costs andincrease profits.

  4. Direct fixed costs are incurred by a specific product orservice; indirect fixed costs, are incurred to support thetotal business.

  5. Indirect costs can be broken into two categories: • 1. Traceable costs are indirect costs that can be • allocated to various products on some nonarbitrary • basis. • 2. Nontraceable costs are not assigned to individual • products.

  6. Fixed and variablecost identification allows managers to examine some of the profitability implications of pricing and marketing expenditure decisions on costvolumeprofit relationships and its implications for marketing budgets.

  7. Economies of scaleexist when a large portion of totaloperating costs are fixed and large changes in volumeresult in significant changes in average cost perproduct.

  8. Many firms employ minimal fixed cost strategies, potential negative consequence economies ofscale.As a firm becomes more experienced in producing aproduct, variable costs decrease as volume increases. Phenomenon is"experience curveeffect."

  9. Semifixed (stepped) costs • Semifixed costs are costs that don't vary automatically • on a per unit basis, but may change if substantial • decreases in volume take place. Increased demand will • result in average costs increasing temporarily if a step • up in certain fixed costs is necessary.

  10. Retailers are interested physical assets and inventory investment. • Inventory turnover is the ratio of a product's sales to the average dollar value of the inventory held for that product.

  11. Retailers are interested physical assets and inventory investment. • Sales per square foot is the ratio of a product's sales to the amount of selling space.

  12. Retailers are interested physical assets and inventory investment. • Grossmargin return on inventory investment measures the profit return rather than the sales return on inventory investment.

  13. Retailers are interested physical assets and inventory investment. • Grossmargin per square foot is equivalent to sales per square foot multiplied by percentage gross profit margin.

  14. managers must have an understanding of product objectives and industry sales forecasts to develop a budget. The budgeting process can proceed in either of two ways: • direct approach • indirect approach

  15. direct approachindirect approach • With the direct approach, managers. make specific estimates of the sales that will result from a given price and marketing budget

  16. direct approachindirect approach • With the indirect approach, managers need only to estimate whether or not a benchmark level of sales can be achieved

  17. direct approachindirect approach • If the cost of customer service is known, management can use a variation of the indirect method of budgeting to calculate the budget required to maintain a determined level of total contribution.

  18. Crosselasticity effects reflect the interdependencies in demand across a set of products. These effects can be of two types: • Substitution effects • Complementary products

  19. Substitution effects • Substitution effects take place when two or more products or services are used to perform the same generic function and changes in the marketing effort will have some effect on other similar products.

  20. Complementary products • Complementary products are those products that experience a sales increase when related products experience an increase in support based on related use, enhanced value,quality supplements, & convenience.

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