break even point and target costing
TRANSCRIPT
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Margins & ProfitsChapter 3
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Marketing Spending
Total expenditure on marketing activities
To forecast marketing spending and assess budgetingrisk
To be distinguished in to variable and fixed marketingcosts
Variable selling costs vary directly with the monetaryvalue of the units soldthat is, with revenue
Classification depends on an organizations structureand on the specific decisions of management
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Continued
Fixed marketing costs might include Sales force salariesand support, Major advertising campaigns, includingproduction costs, Marketing staff etc.
Variable marketing costs might include Salescommissions paid to sales force, brokers, ormanufacturer representatives, Sales bonuses contingenton reaching sales goals etc.
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Construction
Total Selling (Marketing) Costs ($) = Total Fixed SellingCosts ($)+Total Variable Selling Costs ($)
Total Variable Selling Costs ($)= Revenue ($) * Variable
Selling Cost (%)
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Benefits of the metric
Budgeting in this way is more accurate
In fixedamount budget, if sales miss their declaredtargets at end of period, discrepancy may arise
Flexible budget reflect actual results, regardless ofwhere sales end up
Short-term risks associated with fixed marketing costsare greater
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Example
Henrys Catsup spends 10 million to sales force
Broker offers to sell for 5% commission
At $100 million TVC=100* 5%=5 million At $200 million TVC= 10 million
At $300 million TVC= 15 million
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Data Sources, Complications,
and Cautions Variable costs are difficult to measure
Cases where variable costs apply only to some parts ofrevenue
some expenses may appear to be fixed when they areactually stepped
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Related Metrics and Concepts
Marketing As a Percentage of Sales (%)= MarketSpending/ Revenue
Advertising As a Percentage of Sales (%)= Advertisement
Spending/ Revenue
Slotting Allowances:selling costs encountered whennew items are introduced to retailers or distributors
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Break-Even Analysis and
Contribution Analysis The break-even level represents the SALES AMOUNT - in either unit orrevenue terms - which covers TOTAL COSTS (both fixed and variable).
Swiss Army Knife
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Break-even on Incremental Investment
Payback Period
Time period to reach Break-even
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Target Volume
Volume of sales necessary to generate profits specified
in a companys plan
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Target revenue
Target revenue : corresponding figure in Dollar sales
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Contribution:
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Enables marketers to find out how much volume should be generated tomeet target profits of a firm