Profitability and Productivity Analysis

nProductivity Analysis is the assessment of the sales or market share consequences of a marketing strategy nProfitability Analysis is the assessment of the impact of various marketing strategies on the profit contribution that can be expected from a product or product line

Factors to Consider in Making Marketing Expenditures Impact on Profitability Structure Expected Productivity in Terms of Sales Product Objective Industry Sales Forecast Decision

LINKSTER INC: Profit and Loss Statement Sales $4640 Less cost of goods sold Gross Profit Margin $2340 Operating Expenses: Advertising $600 Sales Salaries Sales Commissions Designer’s Salaries Other (general and admin. costs ) Total operating expense Net operating profit (loss) before taxes $20

Measuring Product Profitability Need to Distinguish Between: nVariable costs nFixed Costs –direct or tracable –indirect or nontracable

LINKSTER INC: Contribution Margin Statement Sales $4640 Less variable cost of goods sold (Labor, materials, etc.) Gross Profit Margin $3020 Less other variable selling costs (sales commissions) Variable contribution margin $2800 Fixed costs: Advertising $600 Sales salaries Fixed production costs Designer’s salaries General and administrative overhead Total operating expense Net operating profit before taxes $ 20

Company TotalUmbrellasSweatersJacketsCap Sales$4640$840$2400$1200$200 Variable cost of goods sold Gross Profit Margin$3020$440$1600$ 820$160 Other variable costs Variable contribution margin$2800$400$1480$ 760$160 Direct, traceable fixed costs: Sales salaries$ 500$ 20$ 360 $ 120$ 0 Designer’s salaries Fixed production costs Advertising of product lines Total$1880$160$1200$ 510$ 10 Total Contribution$ 920$240$ 280$ 250$150 Indirect, nontraceable fixed costs: Institutional advertising$ 300 General and admin. overhead 900 Total$1200 Net Operating Profit$ 20 LINKSTER INC: Contribution by Product Line

LINKSTER INC: Percentage Variable Contribution Margins UmbrellasSweaters JacketsCaps Number of customers 28,00040,000 20,00050,000 Average price paid $30$60$60 $4 Variable Cost per Unit $15.71$23.00$22.00 $0.80 Variable Contribution Margin per Unit (Average price - Variable cost) $14.29$37.00$38.00 $3.20 PVCM = (Price - VC) 47.6% 61.6% 63.3% 80% Price

Cost-Volume-Profit Relationships nEconomies of Scale nExperience Curve Effect

Economies of Scale for Sweaters Annual sales volume 40,000 units80,000 units Unit variable cost $ 23$ 23 Multiplied by volume 40,000 80,000 Total variable cost$ 920,000 $1,840,000 Plus: Total direct fixed cost$1,200,000$1, Total Direct Cost$2,120,000$3,014,000 Divided by Volume 40,000 80,000 Average Unit Cost$ 53$ 38 Annual sales volume 40,000 units80,000 units Unit variable cost $ 23$ 23 Multiplied by volume 40,000 80,000 Total variable cost$ 920,000 $1,840,000 Plus: Total direct fixed cost$1,200,000$1, Total Direct Cost$2,120,000$3,014,000 Divided by Volume 40,000 80,000 Average Unit Cost$ 53$ 38

The Direct Approach to Marketing Budgets 1. Develop an industry sales forecast 2. Estimate the market share that will result from a given price and marketing expenditure level 3. Calculate expected company sales (Market share X Industry Sales Forecast) 4. Calculate variable contribution (Company Sales X Percentage Contribution Margin) 5. Calculate total net contribution (Variable Contribution Margin less Direct Fixed Costs) 6. Determine whether sales, market share and total contribution levels are acceptable

LINKSTER INC: Projected Profitability for Jackets Current Year Projected Sales$1200$1500 X PVCM Variable Contribution Margin$ 760$ 950 Direct, traceable fixed costs: Sales salaries$120$120 Advertising Design Fixed production Total, direct traceable $ 510$ 610 Total Contribution$ 250$ 340 Current Year Projected Sales$1200$1500 X PVCM Variable Contribution Margin$ 760$ 950 Direct, traceable fixed costs: Sales salaries$120$120 Advertising Design Fixed production Total, direct traceable $ 510$ 610 Total Contribution$ 250$ 340

Productivity Analysis nAnalysis of Historical Relationships nCompetitive Parity Analysis nMarket Experiments nJudgment-Based Productivity Estimates nCross-Elasticity Effects

Judgment-Based Productivity Estimates uWhat level of expenditure is needed to maintain current market share? uWhat minimum level of market share will result if expenditures are reduced to Zero? uWhat level of market share will result if expenditures are increased by 50%? uWhat is the maximum market share that could be obtained if expenditures were unlimited?

Judgment-Based Productivity Estimates Market Share Advertising (Million $) (Max) 15 (Plus fifty) 13 (Current) 10 (Min)

Cross-Elasticity Effects uSubstitution Effects uComplementary Effects ERelated Use EEnhanced Value EConvenience

LINKSTER INC: Projected Budget with Cross- Elasticity Effects