MARK 4900 Exam 1 Study Guide Strategic Marketing Problems Chapter 2 Financial Aspects of Marketing Management Variable and Fixed Costs Variable Costs o Expenses that are uniform per unit of output within a relevant time period usually defined as a budget year yet total variable costs fluctuate in direct proportion to the output volume of units produced o As volume increase total variable costs increase o Two categories Cost of goods sold Ex materials labor and factory overhead applied directly to production Expenses not directly tied to production but that nevertheless vary directly with volume Ex sales commissions discounts and delivery expenses Fixed Costs o Expenses that do not fluctuate with output volume within a relevant time period the budget year but become progressively smaller per unit of output as volume increases o The decrease in per unit fixed cost results from the increase in the number of output units over which fixed costs are allocated o No matter how large volume becomes the absolute size of fixed costs remains unchanged o Two categories Programmed Costs Result from attempts to generate sales volume Ex marketing expenditures advertising sales promotion and sales salaries Committed Costs Required to maintain the organization Usually non marketing expenditures such as rent and clerical salaries Relevant and Sunk Costs Relevant Costs o Expenditures that are expected to occur in the future as a result of some marketing action and differ among marketing alternatives being considered o Future expenditures unique to the decision alternatives under consideration o Opportunity costs are also relevant costs o Ex a manager considers adding a new product to the product mix relevant costs include potential expenditures for manufacturing and marketing the product plus salary costs arising from the time sales personnel give to the new product at the expense of other products if the additional product does not affect salary costs of sales personnel it is not a relevant cost Sunk Costs o The direct opposite of relevant costs o Past expenditures for a given activity and are typically irrelevant in whole or in part to future decisions o Ex past R D and last years advertising expense o Sunk cost fallacy When marketing managers attempt to incorporate sunk costs into future decisions affecting new expenditures they attempt to recoup spent dollars by spending still more dollars in the future Margins Margin o The difference between the selling price and the cost of a product or service o Expressed on a total volume basis or on an individual unit basis in dollar terms or as percentages Gross Margin o Aka gross profit the difference between total sales revenue and total cost of goods sold can be referred to in dollars or percent o Per unit basis the difference between unit selling price and unit cost of goods sold o A decrease in gross margin is of immediate concern to marketing managers because it has a direct affect on profits o Changes should be examined in depth to determine whether the change was brought about by fluctuations in unit volume changes in unit price or cost of goods sold or a modification in the sales mix of the firm s products or services Trade Margin o Difference between unit sales price and unit cost at each level of a marketing channel o Frequently referred to as a markup or mark on by channel members often expressed in percentages o Trade margins percentages are usually determined on the basis of selling price but practices do vary among firms and industries Net Profit Margin Before Taxes o The remainder after cost of goods sold other variable costs and fixed costs have been subtracted from sales revenue expressed in dollars and percent o Represent a major source of funding for the organization o Also affects the organization s cash flow position Contribution Analysis Contribution o The difference between total sales revenue and total variable costs on a per unit basis the difference between unit selling price and unit variable cost Contribution Analysis o Useful in assessing relationships among costs prices and volumes of products and services with respect to profit Break Even Analysis o One of the simplest applications of contribution analysis o Identifies the unit or dollar sales volume at which an organization neither makes a profit nor incurs a loss Total Rev total variable cost total fixed cost o Requires 3 pieces of information An estimate of unit variable cost An estimate of the total dollar fixed costs to produce and market the product or service unit The selling price for each product or service unit Unit break even volume total dollar fixed costs Unit selling price unit variable costs Contribution Margin unit selling price unit variable cost Unit selling price Break even Dollar Volume total fixed costs Contribution margin Contribution Analysis and Market Size o A manager can assess the feasibility of a venture by comparing the break even volume with market size and market capture percentage Assessment of Cannibalization o Cannibalization is the process by which one product or service sold by a firm gains a portion of its revenue by diverting sales from another product or service also sold by the firm Liquidity Liquidity o Refers to an organization s ability to meet short term usually within a budget year financial obligations a key measure of an organization s liquidity position is its working capital o Working capital Is the dollar value of an organization s current assets cash AR prepaid expenses inventory minus the dollar value of current liabilities shortterm AP for goods and services and income taxes Operating Leverage Operating Leverage o The extent to which fixed costs and variable costs are used in the production and marketing of products and services o Firms that have high total fixed costs relative to total variable costs are defined as having high operating leverage o Firms with low total fixed costs relative to total variable costs are defined as having low operating leverage o The higher a firm s operating leverage the faster its total profits will increase once sales exceed break even volume those firms with high operating leverage will incur losses at a faster rate once sales volume falls below the break even point Market Based Management Chapter 2 Marketing Metrics and Marketing Profitability Marketing Metrics Market Metrics o Measure a market with respect to current performance and profit impact Customer Metrics o Gauge a business or