Outline of 363

Financial Analysis for Marketing Decisions

Terminology

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Cost

Variable – cost varies with sales over time   Fixed – costs remain constant even though volume of activities changes

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Contribution

 

Diff between price per unit & variable cost per unit

   

Unit contribution = P(per unit) – VC(per unit) Net contribution

((P – VC) * V) – FC)   Π=Net Profit = (P-VC)Q-FC

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Simple Totals

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Total Revenue = PxQ Total VC = VC x Q Total Contribution = Total Revenues – Total VC Q x Unit contribution Total Cost = FC + Total VC Net Profit = Total Revenues – Total Cost (PxQ) – VC - FC

An Example

What are the Unit and Total Contributions if 1.  Price = 5 2.  Price = 6 3.  Price = 7.50

Break Even Analysis…again

  At

what quantity will

  Total

Revenues = Total Costs?   ANS: THE BREAK EVEN QUANTITY

= volume or sales ($) at which total costs are just covered by total revenues   Why is it important?

  Determines

the conditions under which the firm should remain in the market

Break Even Calculations

  Calculate

BE on how much to produce or sell   Break Even Quantity (BE)

= FC / Unit Contribution = FC/(P-VC)

  Break   If

Even Sales (in $s)

= BE*P

FC = $500, P = $3, VC = $1.

  What

is the BE quantity?   What are your break even sales?

Target Profit (TP) Analysis

  Most

firm seek profit levels beyond BE level   Target Profitability Volume

= (FC+TP)/Unit Contribution = (FC+TP)/(P-VC)

  Let’s

go back to the earlier example:

  How

many units must you sell to make a $250 profit?

Cost Based Pricing: Markup

 

Usually applies to a chain of firms

Wholesaler Retailer Consumer

Manufacturer

 

When firms buy a product at a price (cost of sales) and sell it at a higher price (selling price), the difference between the cost of sales and selling price is called markup (or margin) Selling Price = Cost of Sales + Markup

 

A...