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15

Chapter

Marketing Cost and Profitability Analysis
Business prophets tell us what should happen – but business profits tell us what did happen. Earl Wilson

Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

customer group. 15-1) Comparison Factors Bases for computing costs Marketing Cost Analysis Marketing unit: territory.A Comparison of Marketing Cost Analysis and Production Cost Accounting (Fig. Inc. All rights reserved. order size. . as well as product More complex Production Cost Accounting Unit of product Relatively simple Machines and closely supervised workers More precise Cost is a function of volume C=f(V) Relatively easy to measure Source of cost incurred Salespeople in the field Less exact Cost-volume relationship Volume is a function of cost V=f( C ) Difficult to measure Copyright © 2003 by The McGraw-Hill Companies.

240   Sales force travel 372   Supplies and telephone 178   Media space 870   Advertising salaries 218   Property taxes 120   Heat and light 168   Insurance 84   Administrative salaries 930   Other expenses 120 Total operating expenses Net profit Copyright © 2003 by The McGraw-Hill Companies.000 18. Inc. $27.900 8. 15-2) Net sales Less cost of goods sold Gross margin Less operating expenses:   Sales salaries and commissions $3.Income and Expense Statement.100 6. All rights reserved. 2002.800 .300 $ 1. Colorado Ski Company ($000) (Fig.

000 .000 14.000 62.000 — Supplies & telephone 178.000 43.000 — 218.000 372.000 1 Copyright © 2003 by The McGraw-Hill Companies.000 4. Inc.000 58.000 .500 — — — — 66.000 3.000 — Sales force travel 372. All rights reserved.200 — — 15.200 22.000 15.000 — 870.000 13.000 144. salaries 930.500 11.Expense Distribution Sheet.300 480.300 17.700   Totals $6.000 240. 2002 (Fig.000 $3.000 12.300 26.000 Advertising salaries 218.000 10.000 Property taxes 120.200 Administ.200 513.000 168.000 — — 28.847.900 43.240.500 16.000 Other expenses 120.240.000 10.500 18.220. Activity Cost Categories Personal Warehousing Order Selling Advertising and Shipping Processing Administratio — — — — 40.000 14. Colorado Ski Company.000 100. 15-3) (showing allocation of ledger expense items to activity categories) Ledger expenses Totals Sales salaries/commis $3.200 46.000 126.400 Insurance 84.300 14.200 Media space 870.500 430.600 7.500 Heat and light 168.300.

000 units — Midwestern cost $747.000 $79.000 — — $1. Col Ski Co.500 orders 28.000 9. 2002 (Fig. 15-4) Activity Allocation basis Total activity cost No. of orders No.000 units — Western cost $2.000 61 pages $240.Allocation of Activity Costs to Sales Regions.000 $171.500 lines one $190. $20. All rights reserved. Inc.000 3.600 orders 120. units — cost $1.000 $105.00 $480.000 lines one $125.000 $513. of pagesNo.000 lines 3 regions $171.000 .847.300 orders 52.030. $50 per order $2 per line Allocation of Costs Copyright © 2003 by The McGraw-Hill Companies.000 3.000/pg.800 orders 39.000 $171.070.000 2. of invoice Equally among to each region of ads shipped lines regions $3.000 29 pages $580. of  allocation units Cost per allocation unit Region Personal Selling Warehousing Order Advertisingand Shipping Processing Administration Allocation Scheme Direct expense No.500 lines one $165.000 Eastern 21 pages $420.000/reg.000 $171.000 11 pages $220.000 $56.220.

.350 802 220 125 56 171 1.60% $4. All rights reserved.975 580 165 105 171 2.800 6. by Sales Region.000 $9.300 $ 1.Income and Expense Statement.900 6.374 ($24) (0. Col Ski Co.100 2.000 18. 2002 ($000) (Fig.300 8.500 9.53%) Copyright © 2003 by The McGraw-Hill Companies.500 3.070 420 190 79 171 1.054 7.450 4. Inc.220 480 240 513 6.996 $ 1. 15-5) Total Eas rn Midw s te e tern Net sales Less cost of goods sold Gross margin Less operating expenses:   Personal selling   Advertising   Warehousing/shipping   Order processing   Administration Total operating expenses Net profit (loss) Net profit (loss) as perce ntage of sales We te s rn $13.930 $  770 8.80% $27.847 1.70% 1.700 3.150 1.050 1.

high­volume market segment with a large  share of the indirect cost. but inaccurate and usually unfair  whatever market segments are being  to some market segments. This method is  simple and easy to do. That is. charge a  product or customer group). Falsely assumes a close  accounted for 25 percent of the total  relationship between direct and indirect  direct  costs. then A would also be  expenses. charged with 25 percent of the  indirect  expenses.Methods Used to Allocate Indirect Costs (Fig. Copyright © 2003 by The McGraw-Hill Companies. Allocate costs in proportion to sales  Underlying philosophy: apply cost burden  volume obtained from each territory (or where it can best be borne. 15-6) Method Evaluation Divide cost equally among territories or  Easy to do. . Inc. but may be very  inaccurate. analyzed. All rights reserved. Tells very little about a segment’ Allocate indirect costs in same proportion  Again. easy to do but can be inaccurate and  as the total direct costs. Thus if product A  misleading.

946 Copyright © 2003 by The McGraw-Hill Companies.206 $1.500 9. Inc.104 $ 3.000 6.104 $1.642 351 54 57 2.000 18. 15-7) Total Easte Midwe rn We rn rn ste ste Net sales Less cost of goods sold Gross margin Less direct  operating expenses:   Personal selling   Advertising   Warehousing/shipping   Order processing Total direct  expenses Contribution margin Less indirect  operating expenses:   Personal selling   Advertising   Warehousing/shipping   Order processing   Administration Total indirect  expenses Ne profit t $27.100 3.196 $1.Income and Expense Statement by Sales Region. in $000.494 $4.700 845 254 64 43 1.500 3.800 $9.350 595 127 42 30 794 $  556 $13.300 2. . using contribution-margin approach (Fig.996 765 488 320 110 513 $2.150 1.450 4. All rights reserved.900 8. Col Ski Co 2002.082 732 160 130 4.050 1.

and accounting expenses connected with three of the four orders. Point out that the buyer eliminates all handling. This new policy may actually increase sales because sales reps can spend more time with profitable accounts. In fact. •Educate the sales force as well as customers. Stress the advantages of purchasing from one supplier. •Establish a minimum charge or a service charge to combat small orders Copyright © 2003 by The McGraw-Hill Companies. Inc. stress that there will be only one bill to process and one shipment to put into inventory instead of three or four. or continue to call on these accounts. even by mail or telephone. All rights reserved. 15-8 Ways to Increase Order Size and Reduce Small Order Marketing Costs •Educate customers who buy from several different suppliers. •Drop a mass-distribution policy and adopt a selective one. but less frequently.Fig. it may be necessary to change the compensation plan to discourage acceptance of smaller orders. •Establish a minimum-order size. In addition. •For customers who purchase large total quantities in frequent small orders. . billing. stress the advantages of ordering once a month instead of once a week. •Shift an account to a wholesaler or some other type of middleman rather than dealing directly. •Substitute direct mail or telephone selling for sales calls or unprofitable or small-order accounts. Note further that the buyer writes only one check and one purchase order.

000 Contribution margin Profit on sales % = Sales volume = 1.000 x 100 = 14.200.200.38 = 34.000.000 7.000.000 x x 10.000 4.000 150.000 850.000.200.000.000 150.000 2.200.000 = = 10.000 2.000 Accounts receivable + = $ 4.000.5% Asset turnover = Sales volume $10.38 ROAM = Profit on sales % x Asset turnover 1.000 150.Return on Assets Managed (ROAM) Sales Cost of goods sold Gross margin Salaries Commission Travel District office expense Total direct expenses Contribution margin Accounts receivable Inventories Total assets $ 10.000 10.000 Inventories = 2.000 400.450.000.000 3. All rights reserved.000 $ 4.000 $ 1. .450.000. Inc.000.000 2.5% 14.5% Copyright © 2003 by The McGraw-Hill Companies.450.