Professional Documents
Culture Documents
Financial Aspects of
Marketing Management
Types of Cost
Costs
Fixed
Costs
Variable
Costs
Fixed Costs
Expenses that do not fluctuate with
output volume within a relevant
time period
They become progressively smaller
per unit of output as volume
increases
No matter how large volume
becomes, the absolute size of fixed
costs remains unchanged
1. Programmed costs
2. Committed costs
Relevant and
Sunk Costs
Margins
The difference between the
selling price and the cost of a
product or service
Margins are expressed in both
dollar terms or as percentages on:
a total volume basis, or
an individual unit basis
On a per-unit basis:
The difference between unit selling
price and unit cost of goods sold
Gross Margin
Total Gross Margin
Net Sales
$100
100%
- 40
$ 60
60%
$1.00
100%
- 0.40
- 40
$0.60
- 40
60%
Trade Margin
Unit Cost of
Goods Sold
Unit
Selling Price
Gross Margin
as a % of
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
Dollar Amount
Percentage
$ 100,000
100%
- 30,000
$ 70,000
- 30
70%
Selling Expenses
- 20,000
- 20
Fixed Expenses
- 40,000
- 40
$ 10,000
10%
Contribution Analysis
Contribution is
The difference between total sales
revenue and total variable costs
OR on a per-unit basis
The difference between unit selling price
and unit variable cost
Break-Even Analysis
Break-even point is the unit or dollar
sales at which an organization neither
makes a profit nor a loss.
At the organizations break-even sales
volume:
Total Revenue = Total Cost
Total Revenue
BE Point
PROFIT
Total Cost
Variable Cost
LOSS
Fixed Cost
Unit Volume
Break-even Analysis
Example
Fixed Costs
= $50,000
= $5
Variable Cost
= $3
Contribution
= $5 - $3 = $2
Breakeven Volume
= $50,000 $2
= 25,000 units
Breakeven Dollars
= 25,000 x $5
= $125,000
Applications of
Contribution Analysis
Sensitivity Analysis
Profit Impact
Market Size
Performance Measurement
Assessment of Cannibalization
Liquidity
Refers to a companys ability to meet
short-term financial obligations
Very important for a companys day-today operations
A key factor is Working Capital = Current
Assets minus Current Liabilities
Operating Leverage
Extent to which fixed costs and variable
costs are used in the production and
marketing of products and services.
Firms with high total fixed costs relative
to total variable costs are defined as
having high operating leverage.
Higher operating leverage results in a
faster increase in profit once sales
exceed break-even volume. The same
happens with losses when sales fall
below break-even volume.
$1,000,000
500,000
500,000
300,000
155,000
$45,000