CH 8 - Marketing Decisions

Question 1

Marketing

Answer 1

Marketing is the business activity that aims to understand customer needs and satisfy those needs more effectively than competitors

Question 2

Sales mix

Answer 2

Mix of products/services offered by the business

Question 3

Market segments

Answer 3

• Defined by its unique characteristics

* Customer relationship management

Question 4

4 P’s

Answer 4

Product, price, place, and promotion

Question 5

Marketing Strategy

Answer 5

Decisions about product/service mix, customer mix, market segmentation, value and cost drivers, pricing, and distribution channels

Question 6

Fixed costs

Answer 6

Do not change with increases in business activity (rent, utilities)

Question 7

Variable costs

Answer 7

Increase or decrease in proportion to an increase or decrease in business activity (direct labour, raw material)

Question 8

Average costs

Answer 8

Total of both fixed and variable costs divided by the total number of units produced

Question 9

Step costs

Answer 9

Constant within a particular level of activity, but can increase when activity reaches a critical level

Question 10

Mixed costs

Answer 10

Have both fixed and variable components

Question 11

Marginal cost

Answer 11

Cost of producing one extra unit

Question 12

Operating Profit

Answer 12

Difference between revenue and costs (both fixed and variable)

Operating profit = Revenue - (Fixed costs + Variable costs)

Question 13

Operating Profit Formula

Answer 13

P = Sx - (F + Vx)

P = Profit
S = Selling Price
x = Number of units sold
F = Total Fixed cost
V = Variable cost per unit

Question 14

Cost–Volume–Profit (CVP) Analysis

Answer 14

Understanding the relationship between changes in activity (# units sold) and changes in selling prices and costs (fixed & variable)

Question 15

Relevant range

Answer 15

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

Question 16

Contribution margin (CM)

Answer 16

Contribution margin (CM) is calculated by deducting the variable costs from the revenues for a product or service (SP-VC)

Question 17

Unit contribution margin (UCM)

Answer 17

Contribution Margine (Revenues - Variable Costs) for one unit

Question 18

Contribution margin ratio (CM Ratio)

Answer 18

Contribution margin ratio (CM Ratio) is the contribution margin divided by the revenues (SP-VC)/SP

Question 19

What is a Contribution Margin Income Statement used for?

Answer 19

Companies can analyze contribution margin to determine how fixed costs are affecting revenues

Question 20

Traditional Income Statement

Answer 20

Revenues less CoGS = Gross margin

CoGS may include both variable and fixed costs

Hard to analyze VC/FC relationship to revenue

Question 21

Breakeven (B/E)

Answer 21

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

Question 22

Breakeven (B/E) Analysis

Answer 22

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

Question 23

Breakeven Formula is Units

Answer 23

Breakeven in units = Fixed costs/(Selling price per unit – variable cost per unit)

FC/(SP-VC)

Question 24

Breakeven Formula in Sales (Two options)

Answer 24

Breakeven in sales = Fixed costs/Contribution Margin ratio

FC/CM ratio

OR

BE Sales = BE units x sales price

Question 25

Target Profit Formula

Answer 25

(Variation on Breakeven)

Fixed costs + Profit/ (Selling price per unit – variable costs per unit)

Question 26

Margin of Safety

Answer 26

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

Question 27

Operating Leverage

Answer 27

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.

Question 28

Assumptions of CVP Analysis

Answer 28

1. Costs can be clearly segregated between fixed and variable
2. The behaviour of costs is linear
3. 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)
4. A single product/service or a product/service mix remains constant
5. CVP analysis applies only to the relevant range
6. CVP analysis has a short-term focus and cannot really be used as a long-term planning tool

Question 29

Cost-plus pricing

Answer 29

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

Question 30

Target Rate of Return Pricing

Answer 30

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.

Question 31

Market Pricing

Answer 31

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

Question 32

Optimum Selling Price

Answer 32

Point at which profit is maximized

Can be determined by comparing the contribution margin

Question 33

Special Pricing Decisions

Answer 33

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.

Question 34

Long term marketing implications for Special Pricing Decisions

Answer 34

1. The future selling price may be affected by accepting a special order if competitors adopt similar pricing tactics.
2. Customers who receive or become aware of a special selling price may expect a similar low price in the future.
3. Accepting this order may prevent the firm from accepting a more profitable order at a higher price if one subsequently comes along.

Question 35

Transfer Pricing

Answer 35

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

Question 36

General guideline (formula ) for setting a transfer price

Answer 36

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

Question 37

Decisions to Keep or Drop a Product Line

Answer 37

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.

Question 38

Unavoidable costs

Answer 38

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.

Question 39

Avoidable costs

Answer 39

Avoidable costs are identifiable with and are able to be influenced by decisions made at the business-unit level.