Chapter 2 Financial Aspects of Marketing Management

1. Chapter 2Financial Aspects of Marketing Management

2. Variable and Fixed Costs Variable Costs • uniform per unit of output, within a time frame • fluctuate in proportion to output Fixed Costs • remain constant within a time frame • per unit cost decreases with increase in output • programmed costs (e.g., marketing expenses) • committed costs

3. Relevant and Sunk Costs Relevant Costs • occur in the future • differ among alternatives being considered Sunk Costs • occurred in the past • mostly irrelevant to future decisions • sunk cost fallacy

4. Total Gross Margin Dollar Amount Percentage Net Sales $100 100% Cost of Goods Sold - 40 - 40 Gross Profit Margin $ 60 60% Unit Gross Margin Unit Sales Price $1.00 100% Unit Cost of Goods Sold - 0.40 - 40 Unit Gross Profit Margin $0.60 60% Gross Margin

5. Trade Margin Suppose a retailer purchases an item for $10 and sells it at $20. Retailer Margin as a percentage of cost is: $10 / $10 x 100 = 100 percent Retailer Margin as a percentage of selling price is: $10 / $20 x 100 = 50 percent

6. Gross Margin as a Percentage of Selling Price Unit Cost of Goods Sold Unit Selling Price Manufacturer $2.00 $2.88 30.6% Wholesaler 2.88 3.60 20.0 Retailer 3.60 6.00 40.0 Consumer 6.00 Trade Margin

7. Contribution Analysis Break-even point is the unit or dollar sales at which an organization neither makes a profit nor a loss. At the organization’s break-even sales volume: Total Revenue = Total Cost

8. total dollar fixed cost Unit break-even volume = unit price - unit variable cost unit selling price - unit variable cost Contribution Margin = unit selling price Contribution Analysis Break-even Analysis

9. Total Revenue BE Point Profit Total Cost Variable Cost Fixed Cost Loss Break-even Analysis Chart Dollars 0 Unit Volume

10. Applications of Contribution Analysis • Sensitivity Analysis • Profit Impact • Market Size • Performance Measurement • Assessment of Cannibalization