CH 8 - Marketing Decisions Flashcards
Marketing
Marketing is the business activity that aims to understand customer needs and satisfy those needs more effectively than competitors
Sales mix
Mix of products/services offered by the business
Market segments
- Defined by its unique characteristics
* Customer relationship management
4 P’s
Product, price, place, and promotion
Marketing Strategy
Decisions about product/service mix, customer mix, market segmentation, value and cost drivers, pricing, and distribution channels
Fixed costs
Do not change with increases in business activity (rent, utilities)
Variable costs
Increase or decrease in proportion to an increase or decrease in business activity (direct labour, raw material)
Average costs
Total of both fixed and variable costs divided by the total number of units produced
Step costs
Constant within a particular level of activity, but can increase when activity reaches a critical level
Mixed costs
Have both fixed and variable components
Marginal cost
Cost of producing one extra unit
Operating Profit
Difference between revenue and costs (both fixed and variable)
Operating profit = Revenue - (Fixed costs + Variable costs)
Operating Profit Formula
P = Sx - (F + Vx)
P = Profit S = Selling Price x = Number of units sold F = Total Fixed cost V = Variable cost per unit
Cost–Volume–Profit (CVP) Analysis
Understanding the relationship between changes in activity (# units sold) and changes in selling prices and costs (fixed & variable)
Relevant range
The volume of activity that the business expects to be operating over the short term
Accountants assume a constant product/service mix and average selling prices per unit within a relevant range
Contribution margin (CM)
Contribution margin (CM) is calculated by deducting the variable costs from the revenues for a product or service (SP-VC)
Unit contribution margin (UCM)
Contribution Margine (Revenues - Variable Costs) for one unit
Contribution margin ratio (CM Ratio)
Contribution margin ratio (CM Ratio) is the contribution margin divided by the revenues (SP-VC)/SP
What is a Contribution Margin Income Statement used for?
Companies can analyze contribution margin to determine how fixed costs are affecting revenues
Traditional Income Statement
Revenues less CoGS = Gross margin
CoGS may include both variable and fixed costs
Hard to analyze VC/FC relationship to revenue
Breakeven (B/E)
The point at which total costs equal total revenue – there is neither a profit or loss
A company’s breakeven point occurs when its sales equal its costs
The breakeven point can be determined as dollars of sales, or break even in number of units
Breakeven (B/E) Analysis
Often useful to determine the breakeven point for a particular product line
Breakeven analysis is especially useful in determining whether a new product for the company might be successful
Breakeven Formula is Units
Breakeven in units = Fixed costs/(Selling price per unit – variable cost per unit)
FC/(SP-VC)
Breakeven Formula in Sales (Two options)
Breakeven in sales = Fixed costs/Contribution Margin ratio
FC/CM ratio
OR
BE Sales = BE units x sales price
Target Profit Formula
(Variation on Breakeven)
Fixed costs + Profit/ (Selling price per unit – variable costs per unit)
Margin of Safety
A measure of the difference between the anticipated and breakeven levels of activity
Margin of safety (%)
= (Expected sales (units)– Breakeven sales (units))/Expected sales (units) x 100
Operating Leverage
Refers to the mix of fixed and variable costs in a business. Means balancing fixed costs and variable costs in such a way that optimizes the contribution margin per unit with the risk of reaching breakeven.
Assumptions of CVP Analysis
- Costs can be clearly segregated between fixed and variable
- The behaviour of costs is linear
- Changes in costs occur only because of changes in the number of units sold or the level of service provided (variables are kept at a minimum)
- A single product/service or a product/service mix remains constant
- CVP analysis applies only to the relevant range
- CVP analysis has a short-term focus and cannot really be used as a long-term planning tool
Cost-plus pricing
Margin is added to the total product/service cost to establish the selling price
For every product/service the full cost is calculated and then a desired profit margin is added
Full cost includes an allocation of all direct indirect (production, marketing, distributing, selling, finance, admin)
Used if firm is a price leader with no direct competition
Target Rate of Return Pricing
Estimates the fixed and working capital investment required for the business, and takes into account the need to generate an adequate return on that investment to satisfy shareholders
Used if firm wants to earn a predetermined ROI. It leads to pricing decisions closely in line with shareholder value.
Market Pricing
Base its pricing on the competitive market price adjusted to take into account quality, product features, and extended services that may be offered with the product
Used if firm is has competition (considered a price-taker). Also considers quality, features, extended services
Optimum Selling Price
Point at which profit is maximized
Can be determined by comparing the contribution margin
Special Pricing Decisions
Occur when a company has some available capacity or downtime with which to process an order that is outside its normal operations
One-time special orders at a price below the price that the product usually sells for in the market
As fixed costs remain constant irrespective of volume, the selling price must at least cover the variable costs of a special order in order for it to make a positive contribution to recovering some of the fixed costs of the business
Business must have spare capacity that has no alternative use, and the fixed costs must be unavoidable in the short term.
Long term marketing implications for Special Pricing Decisions
- The future selling price may be affected by accepting a special order if competitors adopt similar pricing tactics.
- Customers who receive or become aware of a special selling price may expect a similar low price in the future.
- Accepting this order may prevent the firm from accepting a more profitable order at a higher price if one subsequently comes along.
Transfer Pricing
Transfers between business units
Used for companies with a decentralized org. structure
Helps mgmt. monitor profitability of each division
Must consider opportunity costs:
The additional income that could be earned on sales if they were made to an external party or if the resources were used for another purpose
General guideline (formula ) for setting a transfer price
Minimum transfer price = Incremental costs + Opportunity costs
Transfers between business units based on:
- Market price to external customers
- Marginal cost of making the product
- Full cost of producing the goods or services, including fixed and variable costs but excluding any profit margin
- Full cost of the goods or services plus a mark-up
- Negotiated price
Decisions to Keep or Drop a Product Line
Create chart that separates fixed costs into unavoidable business wide costs and avoidable segment-specific costs. Compare overall costs if you keep or drop the product line. Also consider qualitative concerns.
Unavoidable costs are often allocated by an arbitrary method to each business unit or market segment, although these costs are able to be influenced only at the corporate level.
Avoidable costs are identifiable with and are able to be influenced by decisions made at the business-unit level.
Unavoidable costs
Unavoidable costs are often allocated by an arbitrary method to each business unit or market segment, although these costs are able to be influenced only at the corporate level.
Avoidable costs
Avoidable costs are identifiable with and are able to be influenced by decisions made at the business-unit level.
