Profitability and Productivity Analysis

1. Profitability and Productivity Analysis

2. Productivity Analysis is the assessment of the sales or market share consequences of a marketing strategy Profitability 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 Profitability and Productivity Analysis

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

4. LINKSTER INC: Profit and Loss Statement Sales ................................................................................................... $4640 Less cost of goods sold ................................. ...................... 2300 Gross Profit Margin .............................................................. $2340 Operating Expenses: Advertising ......................................................... $600 Sales Salaries ...................................................... 500 Sales Commissions ............................................. 220 Designer’s Salaries ............................................. 400 Other (general and admin. costs )........................ 600 Total operating expense .......................................... 2320 Net operating profit (loss) before taxes .............................................. $20

5. Measuring Product Profitability Need to Distinguish Between: • Variable costs • Fixed Costs • direct or tracable • indirect or nontracable

6. LINKSTER INC: Contribution Margin Statement Sales ............................................................................................................ $4640 Less variable cost of goods sold (Labor, materials, etc.) ............. 1620 Gross Profit Margin ...................................................................... $3020 Less other variable selling costs (sales commissions) ................. 220 Variable contribution margin ...................................................................... $2800 Fixed costs: Advertising ................................................................. $600 Sales salaries .............................................................. 500 Fixed production costs ............................................... 680 Designer’s salaries ..................................................... 400 General and administrative overhead ......................... 600 Total operating expense ................................................. 2780 Net operating profit before taxes ................................................................. $ 20

7. LINKSTER INC: Contribution by Product Line Company TotalUmbrellas Sweaters Jackets Cap Sales $4640 $840 $2400 $1200 $200 Variable cost of goods sold 1620 400 800 380 40 Gross Profit Margin $3020 $440 $1600 $ 820 $160 Other variable costs 220 40 120 60 0 Variable contribution margin $2800 $400 $1480 $ 760 $160 Direct, traceable fixed costs: Sales salaries $ 500 $ 20 $ 360 $ 120 $ 0 Designer’s salaries 400 0 300 100 0 Fixed production costs 680 100 340 230 10 Advertising of product lines 300 40 200 60 0 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

8. LINKSTER INC: Percentage Variable Contribution Margins Umbrellas Sweaters Jackets Caps Number of customers 28,000 40,000 20,000 50,000 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

9. Cost-Volume-Profit Relationships • Economies of Scale • Experience Curve Effect

10. Economies of Scale for Sweaters Annual sales volume 40,000 units80,000 units Unit variable cost $ 23 $ 23 Multiplied by volume 40,00080,000 Total variable cost $ 920,000 $1,840,000 Plus: Total direct fixed cost $1,200,000$1,200.000 Total Direct Cost $2,120,000 $3,014,000 Divided by Volume 40,000 80,000 Average Unit Cost$ 53 $ 38

11. 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

12. LINKSTER INC: Projected Profitability for Jackets Current Year Projected Sales $1200 $1500 X PVCM .6333 .6333 Variable Contribution Margin $ 760 $ 950 Direct, traceable fixed costs: Sales salaries $120 $120 Advertising 60 160 Design 100 100 Fixed production 230 230 Total, direct traceable $ 510 $ 610 Total Contribution $ 250 $ 340

13. Productivity Analysis • Analysis of Historical Relationships • Competitive Parity Analysis • Market Experiments • Judgment-Based Productivity Estimates • Cross-Elasticity Effects

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

15. Judgment-Based Productivity Estimates Market Share (Max) 15 (Plus fifty) 13 (Current) 10 (Min) 5 Advertising (Million $) 1.5 2.0 3.0

16. Cross-Elasticity Effects • Substitution Effects • Complementary Effects • Related Use • Enhanced Value • Convenience

17. LINKSTER INC: Projected Budget with Cross-Elasticity Effects