territory and product level profitabilty

Chapter FourChapter Four Territory & Product Level ProfitabilityTerritory & Product Level Profitability 11

Learning ObjectivesLearning Objectives

UnderstandUnderstand

How to evaluate performance of sales How to evaluate performance of sales

revenue, expenses and working capital controls at revenue, expenses and working capital controls at

territory levels as well as product levels.territory levels as well as product levels.

What are the different types of costs & how are What are the different types of costs & how are

they controlled, allocated? they controlled, allocated?

Methods to evaluate productivity. Methods to evaluate productivity.


StructureStructure

4.1 Introduction4.1 Introduction

4.2 Costs 4.2 Costs

4.3 Summary 4.3 Summary


4.14.1 IntroductionIntroduction

Earlier we studied how profitability can be increased by :Earlier we studied how profitability can be increased by :

increasing sales revenueincreasing sales revenue

reducing cost of sales reducing cost of sales

reducing selling, distribution, reducing selling, distribution, marketing and administrative expenses.marketing and administrative expenses.

Now we shall evaluate performance [ and thus profitability ] at Now we shall evaluate performance [ and thus profitability ] at territory & product levels to find out more means to increase territory & product levels to find out more means to increase it.it.


4.14.1 IntroductionIntroductionProfitability at territory level can be measured from an Profitability at territory level can be measured from an elementary salesman level toelementary salesman level to

sales supervisory levelssales supervisory levels

area sales manager levelsarea sales manager levels

branch manager levels orbranch manager levels or

ultimately zonal and / or national levels.ultimately zonal and / or national levels.

This evaluation dashboard would show the progress of This evaluation dashboard would show the progress of marketing, help assess productive areas and help in decision marketing, help assess productive areas and help in decision making. making.



The aim of marketing is to The aim of marketing is to

ensure product that is developed, ensure product that is developed, marketed, sold and distributed marketed, sold and distributed satisfies customer requirements.satisfies customer requirements.

and it is sold effectively. and it is sold effectively.

ThatThat means in addition to satisfying the customer it also means in addition to satisfying the customer it also earns profits for the earns profits for the organization.organization.



Let us now try to evaluate profitability for Let us now try to evaluate profitability for DarhamDarhamPharmaceuticals which has all India sales of Rs 174 Pharmaceuticals which has all India sales of Rs 174 crores per annum.crores per annum.

It markets OTC [over the counter] product called It markets OTC [over the counter] product called DarcoldDarcold in tablets and syrup forms.in tablets and syrup forms.

Plus it markets ethical products Plus it markets ethical products DarmetDarmet & & DarcloxDarclox, , antianti--diarrhea & antibiotic formulations respectively . diarrhea & antibiotic formulations respectively . DarmetDarmet again is sold in tablet & syrup forms while again is sold in tablet & syrup forms while DarcloxDarclox is sold in 250mg and 500mg sizes. is sold in 250mg and 500mg sizes.



Monthly Sales Monthly Sales Rs. lacsRs. lacs

ProductsProducts North East West SouthNorth East West South

DarcoldDarcold Tab 10Tab 10 7.57.5 12.512.5 8.758.75Syrup 15Syrup 15 1515 30 2230 22

DarmetDarmet TabTab 80 100 120 60 80 100 120 60 Syrup 125 150 175 Syrup 125 150 175 100 100

DarcloxDarclox 250mg 37.5 45 60 30250mg 37.5 45 60 30500mg 55 110 55 500mg 55 110 55 27.527.5

Total 322.5 427.5 452.5 Total 322.5 427.5 452.5 248.3248.3



The rate of Gross Profit Margins per Product : The rate of Gross Profit Margins per Product :

DarcoldDarcold Tablets 45% & Syrup 50%Tablets 45% & Syrup 50%

DarmetDarmet Tablets 35% & Syrup 42%Tablets 35% & Syrup 42%

DarcloxDarclox 250mg 22% & 500mg 23% 250mg 22% & 500mg 23%

Now we shall look at their Organization & Now we shall look at their Organization & Salaries.Salaries.



Vice President Vice President [Rs 45 lacs][Rs 45 lacs]

General Manager General Manager General Manager General Manager

Marketing Marketing [Rs 36 lacs] [Rs 36 lacs] SalesSales [Rs 32 lacs] [Rs 32 lacs]

DarhamDarham Organization Organization –– DO 01DO 01

CTC CTC –– cost to company per year.cost to company per year.



Vice President Vice President [Rs 45 lacs] [Rs 45 lacs]

Regional Sales Managers Regional Sales Managers [ Rs 20 lacs each][ Rs 20 lacs each]

West North South EastWest North South East




General Manager MarketingGeneral Manager Marketing

Product Manager Manager Market Research Product Manager Manager Market Research [ Rs 18 lacs] [ Rs 18 lacs] [ Rs 16 lacs] [ Rs 16 lacs]




Regional Sales Manager North Regional Sales Manager North

2 # Branch Managers 2 # Branch Managers [ Rs 10 lacs] [ Rs 10 lacs]

4# Sales Supervisors 4# Sales Supervisors [Rs 7.5 lacs] [Rs 7.5 lacs] for each Branch Mgrfor each Branch Mgr

5 # Salesmen 5 # Salesmen [ Rs 5 lacs] [ Rs 5 lacs] for each Supervisorfor each Supervisor

DarhamDarham OrganizationOrganization –– DO 04DO 04



Regional Sales Manager East Regional Sales Manager East

2 # Branch Managers 2 # Branch Managers [ Rs 10 lacs] [ Rs 10 lacs]

4 # & 3 # Sales Supervisors 4 # & 3 # Sales Supervisors [Rs 7.5 lacs] [Rs 7.5 lacs] for two Branch Mgrsfor two Branch Mgrs

respectively.respectively.

4 # Salesmen 4 # Salesmen [ Rs 5 lacs] [ Rs 5 lacs] for each Supervisorfor each Supervisor



4.14.1 IntroductionIntroductionRegional Sales Manager West Regional Sales Manager West

3 # Branch Managers 3 # Branch Managers [ Rs 10 lacs]]

4 # , 4 # & 3 # Sales Supervisors 4 # , 4 # & 3 # Sales Supervisors [Rs 7.5 lacs][Rs 7.5 lacs] for three Branch Mgrsfor three Branch Mgrs

respectively.respectively.

5 # Salesmen 5 # Salesmen [ Rs 5 lacs][ Rs 5 lacs] for each Supervisorfor each Supervisor



4.14.1 IntroductionIntroductionRegional Sales Manager SouthRegional Sales Manager South

2 # Branch Managers 2 # Branch Managers [ Rs 10 lacs]]

5 # Sales Supervisors 5 # Sales Supervisors [Rs 7.5 [Rs 7.5 lacslacs]] for each Branch Managerfor each Branch Manager

4 # & 5 # Salesmen 4 # & 5 # Salesmen [ Rs 5 lacs][ Rs 5 lacs] for each Supervisor of two for each Supervisor of two branches respectively.branches respectively.



4.14.1 IntroductionIntroductionOther ExpensesOther Expenses

Commission to Salesmen Commission to Salesmen -- 3% on OTC product3% on OTC product2% on ethical products.2% on ethical products.

Travelling expenses p.a. Travelling expenses p.a. -- Vice President Rs. 20 lacs.Vice President Rs. 20 lacs.GM Sales Rs. 30 lacs.GM Sales Rs. 30 lacs.GM Marketing Rs. 16 lacs.GM Marketing Rs. 16 lacs.Product Manager Rs. 12 lacs.Product Manager Rs. 12 lacs.Mgr M Research Rs. 8 lacs Mgr M Research Rs. 8 lacs Sales SupervisorSales Supervisor

North Zone Rs. 4 lacs ea.North Zone Rs. 4 lacs ea.South ZoneSouth Zone Rs. 3.5 lacs ea.Rs. 3.5 lacs ea.East Zone Rs. 3.75 lacs ea.East Zone Rs. 3.75 lacs ea.West Zone West Zone Rs. 4.5 lacs eaRs. 4.5 lacs ea



Other ExpensesOther Expenses contdcontd

Travelling expenses Travelling expenses -- Salesmen per Journey CycleSalesmen per Journey CycleNorth Rs 20 KNorth Rs 20 KEast Rs. 18 KEast Rs. 18 KWestWest Rs. 22 KRs. 22 KSouth Rs. 16 KSouth Rs. 16 K

Other Expenses Other Expenses -- OTC Advertising Rs. 2.5 crore.OTC Advertising Rs. 2.5 crore.Medical Sampling Rs. 3 crore.Medical Sampling Rs. 3 crore.Gifts Rs. 1 crore.Gifts Rs. 1 crore.



North East West SouthNorth East West South

Stock Levels Stock Levels Days 75Days 75 8080 9090 5555

Credit ExtendedCredit ExtendedDays 17 18 26 Days 17 18 26 1616

With the above data let us now evaluate With the above data let us now evaluate DarhamDarham’’ssperformance territory & brand wise.performance territory & brand wise.


4.2 Costs4.2 Costs

Before starting evaluation process let us start first with Before starting evaluation process let us start first with understanding understanding ‘‘costscosts’’..

Fixed Costs: Fixed Costs: Are those costs that tend to remain fixed over Are those costs that tend to remain fixed over periods of times irrespective of volumes involved.periods of times irrespective of volumes involved.

Variable Costs : Variable Costs : Are those costs which vary consistently with Are those costs which vary consistently with volumes produced.volumes produced.

Semi Variable Costs : Semi Variable Costs : Are those costs which do not vary in Are those costs which do not vary in proportion to volumes produced, but vary all the same at proportion to volumes produced, but vary all the same at some rate, with increases in volume produced. some rate, with increases in volume produced.


4.2 Costs4.2 Costs

Let us illustrate with a case of T Shirt ManufacturerLet us illustrate with a case of T Shirt Manufacturer

Each T shirt needs Each T shirt needs a] a] cloth costing Rs. 35/cloth costing Rs. 35/-- ; ; b] b] thread Rs. 6/thread Rs. 6/--, , c] c] stitching charge to tailor Rs. 12/stitching charge to tailor Rs. 12/--. Factory pays monthly . Factory pays monthly d] d] rent of Rs. 15,000/rent of Rs. 15,000/-- and and e] e] salary of Rs. 8,000/salary of Rs. 8,000/-- to the to the manager.manager.Electricity charges are incurred for one shift of eight hours, Electricity charges are incurred for one shift of eight hours, but when orders increase, factory works for more hours thus but when orders increase, factory works for more hours thus increasing electricity expenses.increasing electricity expenses.Thus you will see that costs at Thus you will see that costs at a, b, and ca, b, and c are variable in are variable in nature while those at nature while those at d and ed and e are fixed in nature.are fixed in nature.Electricity charges are neither fixed nor variable with changes Electricity charges are neither fixed nor variable with changes in production. These are termed semi variable costs.in production. These are termed semi variable costs.


4.2 Costs4.2 Costs

Let us illustrate with a case of T Shirt ManufacturerLet us illustrate with a case of T Shirt Manufacturer

Unit Costs:Unit Costs:

You will also observe that unit variable cost of Rs. 53/You will also observe that unit variable cost of Rs. 53/--[ 35+6+12] is constant for all levels of production. Volumes [ 35+6+12] is constant for all levels of production. Volumes may increase or decrease but unit variable cost is only Rs. may increase or decrease but unit variable cost is only Rs. 53/53/--..

But when fixed costs are fully allocated to volumes produced , But when fixed costs are fully allocated to volumes produced , unit fixed costs vary with volumes. Higher the volumes lesser unit fixed costs vary with volumes. Higher the volumes lesser unit fixed cost.unit fixed cost.


4.2 Costs4.2 Costs

You can look at costs from the angle of whether same are You can look at costs from the angle of whether same are controllable or uncontrollable at the hands of center head. If controllable or uncontrollable at the hands of center head. If the branch manager can determine the rates & loads of the branch manager can determine the rates & loads of products to be moved from the central depot to distribution products to be moved from the central depot to distribution points, transport costs are points, transport costs are controllable costscontrollable costs for the Branch for the Branch Manager. Manager.

If these are determined by the Head Quarters, then for the If these are determined by the Head Quarters, then for the Branch Manager they are Branch Manager they are uncontrollable costsuncontrollable costs. However if the . However if the HQ fixes only the rates and loads are decided by the Branch HQ fixes only the rates and loads are decided by the Branch Manager , the transport costs are Manager , the transport costs are manageable costsmanageable costs in his in his hands. hands.


4.2 Costs4.2 Costs

Opportunity costsOpportunity costs open up appropriate yard sticks to choose open up appropriate yard sticks to choose between two alternatives. If you buy a color TV you lose between two alternatives. If you buy a color TV you lose interest you would have earned if the money was left in the interest you would have earned if the money was left in the bank. This interest lost is the opportunity cost of the TV!bank. This interest lost is the opportunity cost of the TV!

Incremental Costs Incremental Costs are the extra cost that is incurred in the are the extra cost that is incurred in the extra activity/task/output. It differs from extra activity/task/output. It differs from Marginal Cost Marginal Cost in as in as much as marginal cost is incremental costmuch as marginal cost is incremental cost incurred in incurred in producing one extra unit. In short run it equals unit variable producing one extra unit. In short run it equals unit variable cost.cost.

This overview of costs is useful when we evaluate marketing / This overview of costs is useful when we evaluate marketing / sales performance by territory and/or product brand.sales performance by territory and/or product brand.


4.2 Costs4.2 Costs

Profitability analysis { all figures in Rs. Profitability analysis { all figures in Rs. lacslacs}}

North Zone Gross Margin earned during the year.North Zone Gross Margin earned during the year.

ProductsProducts SalesSales Margin %Margin % Margin Earned Margin Earned

DarcoldDarcold Tabs Tabs 120120 45% 5445% 54

Syrup Syrup 180 50% 90 180 50% 90

DarmetDarmet TabsTabs 960 35% 336960 35% 336

Syrup Syrup 15001500 42% 630 42% 630

DarcloxDarclox 250 250 450 22% 99 450 22% 99

500 500 660 23% 151.8660 23% 151.8

Total 3870 Total 3870 1360.8 1360.8


4.2 Costs4.2 Costs


East Zone Gross Margin earned during the year.East Zone Gross Margin earned during the year.


DarcoldDarcold Tabs Tabs 9090 45% 40.545% 40.5

Syrup Syrup 180 50% 90 180 50% 90


Syrup Syrup 18001800 42% 756 42% 756

DarcloxDarclox 250 250 540 22% 118.8 540 22% 118.8

500 500 1320 23% 303.61320 23% 303.6

Total 5130 1Total 5130 1728.9 728.9


4.2 Costs4.2 Costs


West Zone Gross Margin earned during the year.West Zone Gross Margin earned during the year.



Syrup Syrup 360 50% 180 360 50% 180


Syrup Syrup 21002100 42% 882 42% 882

DarcloxDarclox 250 250 720 22% 158.4 720 22% 158.4

500 500 660 23% 151.8660 23% 151.8

Total 5430 1943Total 5430 1943.7 .7


4.2 Costs4.2 Costs


South Zone Gross Margin earned during the year.South Zone Gross Margin earned during the year.



Syrup Syrup 270 50% 135 270 50% 135


Syrup Syrup 12001200 42% 50442% 504

DarcloxDarclox 250 250 360 22% 79.2 360 22% 79.2

500 500 330 23% 75.9330 23% 75.9

Total 2985 109Total 2985 1093.353.35


4.2 Costs4.2 Costs


Gross margins as % of sales. Gross margins as % of sales.

ZonesZones Sales Sales Margin Margin Margin as RankMargin as Rank

Earned % of SalesEarned % of Sales

NORTH NORTH 3870 1360.8 0.35 33870 1360.8 0.35 3rdrd

EAST 5130 1728.9 0.34 EAST 5130 1728.9 0.34 44thth

WEST WEST 5430 1943.7 0.36 25430 1943.7 0.36 2ndnd

SOUTH 2985 1093.35 0.37 SOUTH 2985 1093.35 0.37 11stst

Total India 17415 6126.75 0.35Total India 17415 6126.75 0.35


4.2 Costs4.2 Costs


Net margins as % of sales. Net margins as % of sales.

ZonesZones Sales Gross Selling & Net Sales Gross Selling & Net NetNet Margin RankMargin Rank

Margin Margin DistriDistri ExpsExps Margin % of SalesMargin % of Sales

NORTH NORTH 3870 1360.8 895.7 465.1 0.3870 1360.8 895.7 465.1 0.12 312 3rdrd

EAST 5130 1728.9 854.2 847.7 EAST 5130 1728.9 854.2 847.7 0.17 10.17 1stst

WEST WEST 5430 1943.7 1219.5 724.2 0.13 5430 1943.7 1219.5 724.2 0.13 22ndnd

SOUTH 2985 1093.35 812.1 281.3 SOUTH 2985 1093.35 812.1 281.3 0.09 40.09 4thth

Total India 17415 6126.75 3781.5 2345.25 Total India 17415 6126.75 3781.5 2345.25 0.130.13


4.2 Costs4.2 Costs

Profitability analysis { all amounts in Rs. Profitability analysis { all amounts in Rs. lacslacs}}

Return on InvestmentReturn on Investment

ZonesZones Stock Receivables Investments ROI Stock Receivables Investments ROI RankRank

Days Amt Days Amount Days Amt Days Amount AmountAmount %%

NORTH NORTH 75 516 17 180 696 75 516 17 180 696 0.67 30.67 3rdrd

EAST EAST 80 745 80 745 1818 253 998 0.88 1253 998 0.88 1stst

WEST WEST 90 860 26 387 1247 90 860 26 387 1247 0.58 40.58 4thth

SOUTH SOUTH 55 285 16 131 416 55 285 16 131 416 0.68 20.68 2ndnd

Total India 2406 951 3357 0.70Total India 2406 951 3357 0.70


4.2 Costs4.2 Costs

Profitability analysis Profitability analysis

Ranking using different evaluation parametersRanking using different evaluation parameters

ZonesZones Gross Margin Net Margin ROI Gross Margin Net Margin ROI

NORTH NORTH 33rdrd 33rdrd 33rdrd

EAST EAST 44thth 11stst 11stst

WEST WEST 22ndnd 22ndnd 44thth

SOUTH SOUTH 11stst 44thth 22ndnd


4.2 Costs4.2 Costs


Results of ranking using different evaluation parameters Results of ranking using different evaluation parameters tabulated earlier indicates that :tabulated earlier indicates that :--

1] In terms of Gross Margins as % of sales , South leads with 1] In terms of Gross Margins as % of sales , South leads with West coming second.West coming second.

2] In case of net margins as % of sales, East is number one 2] In case of net margins as % of sales, East is number one followed by West.followed by West.

It means that South was good in managing the product mix It means that South was good in managing the product mix

(explained later), it slipped in managing expenses.(explained later), it slipped in managing expenses.


4.2 Costs4.2 Costs


Results of ranking using different evaluation parameters Results of ranking using different evaluation parameters tabulated earlier indicates that :tabulated earlier indicates that :--

3] When we finally look at ROI, a different picture emerges. 3] When we finally look at ROI, a different picture emerges. Here East has provided the best ROI of 88%, followed by Here East has provided the best ROI of 88%, followed by South.South.

This analysis proves that territory wise performance has to be This analysis proves that territory wise performance has to be evaluated on several parameters to really decide which zone evaluated on several parameters to really decide which zone is performing well. is performing well.


4.2 Costs4.2 Costs

Sales ForceSales Force Productivity analysis Productivity analysis

ZonesZones Sales Rs Sales Rs lacslacs Sales Force Sales/person Sales Force Sales/person

NORTH NORTH 3870 51 3870 51 75.88 75.88

EAST EAST 5130 38 5130 38 135.00 135.00

WEST WEST 5430 70 5430 70 77.5777.57

SOUTH SOUTH 2985 58 2985 58 51.4751.47

ALL India 17415 217 80.25ALL India 17415 217 80.25


4.2 Costs4.2 Costs

Profitability analysisProfitability analysis

The analysis shows different regions are best performers onThe analysis shows different regions are best performers ondifferent parameters of profitability.different parameters of profitability.

Heads of zones can control some costs like salaries, Heads of zones can control some costs like salaries, travelling expenses or commissions of staff reporting to them. travelling expenses or commissions of staff reporting to them. But they have no control on these costs incurred by HO staff But they have no control on these costs incurred by HO staff like Vice President, GM Sales or Market Research etc.like Vice President, GM Sales or Market Research etc.

Whether expenses are controllable or not, it must be noted Whether expenses are controllable or not, it must be noted that, Center Head can manage expenses to derive maximum that, Center Head can manage expenses to derive maximum mileage from them.mileage from them.


4.2 Costs4.2 CostsProfitability analysisProfitability analysis

Costs incurred by HO staff like Costs incurred by HO staff like Vice President, GM Sales or Market Vice President, GM Sales or Market Research etc. though not controllable by Center Heads, they Research etc. though not controllable by Center Heads, they have to be allocated to the centres to arrive at total costs of have to be allocated to the centres to arrive at total costs of the center and their net margins.the center and their net margins.This allocation over centers can be based on proportion of This allocation over centers can be based on proportion of their their salessales

gross margingross marginnumber of staffnumber of staffnumber of branches/officesnumber of branches/offices

or equally among all centers.or equally among all centers.Let us see how these different methods affect the centerLet us see how these different methods affect the center’’s net s net margins.margins.



Apportionment on the basis of sales / gross margin Apportionment on the basis of sales / gross margin

North East West South IndiaNorth East West South India

Sales in Sales in lacslacs 3870 5130 5430 2985 174153870 5130 5430 2985 17415

Zone Sales 22 30 31 Zone Sales 22 30 31 17 10017 100As % of TotalAs % of Total

Gross Margin 1360.8 1728.9 1943.7 1093.4 6127Gross Margin 1360.8 1728.9 1943.7 1093.4 6127Zone GMZone GMAs % of Total 22 28 32 As % of Total 22 28 32 18 10018 100

ZoneZone ZoneZone ZoneZone ZoneZone


4.2 Costs4.2 Costs


Apportionment on the basis of number of staff and branches Apportionment on the basis of number of staff and branches

North East West South IndiaNorth East West South India

RSM 1 1 1 RSM 1 1 1 1 4 1 4 BM 2 2 3 BM 2 2 3 2 92 9Sales Supervisor 8 7 11 Sales Supervisor 8 7 11 10 3610 36Salesmen 40 28 55 Salesmen 40 28 55 45 16845 168Total 51 38 70 Total 51 38 70 58 21758 217% of total 23% 18% 32% 27%% of total 23% 18% 32% 27% 100%100%Zone OfficeZone Office 1 1 1 1 1 1 1 1 44Branch Office 2 2 3 Branch Office 2 2 3 2 92 9Total / Total / % of Total% of Total 3 3 23%23% 3 3 23%23% 4 4 31%31% 3 3 23%23% 13 13 100%100%

ZoneZone ZoneZone ZoneZone ZoneZone


4.2 Costs4.2 Costs


We have established %s for distribution of common costs We have established %s for distribution of common costs to four Zones.to four Zones.

Assuming the Vice President spends half the time on sales Assuming the Vice President spends half the time on sales and marketing common costs to be allocated areand marketing common costs to be allocated are

OfficerOfficer Salary Salary TravellingTravelling TotalTotal

VPVP 22.522.5 1010 32.532.5

GMGM 3232 3030 6262

TotalTotal 54.554.5 4040 94.594.5


4.2 Costs4.2 Costs


Method # 1Method # 1-- Net Margin after distributing costs on Net Margin after distributing costs on equal basisequal basisto four Zones. (amounts in Rs. to four Zones. (amounts in Rs. lacslacs).).

NorthNorth East West SouthEast West South

Gross MarginGross Margin 1360.8 1728.9 1943.7 1093.4 1360.8 1728.9 1943.7 1093.4

--Apportioned costs 23.6 Apportioned costs 23.6 23.623.6 23.623.6 23.623.6

Net margin Amount 1337.2 1705.3 1920.1 1069.8Net margin Amount 1337.2 1705.3 1920.1 1069.8

as % of sales 34.6 33.2 35.4 35.8as % of sales 34.6 33.2 35.4 35.8


4.2 Costs4.2 Costs


Method # 2Method # 2-- Net Margin after distributing costs on Net Margin after distributing costs on sales basissales basisto four Zones. (amounts in Rs. to four Zones. (amounts in Rs. lacslacs).).



--Apportioned costs 21 27.8 29.5 Apportioned costs 21 27.8 29.5 16.216.2


as % of sales 34.6 33.2 35.3 36as % of sales 34.6 33.2 35.3 36


4.2 Costs4.2 Costs


Method # 3Method # 3-- Net Margin after distributing costs on Net Margin after distributing costs on gross gross margin basismargin basis to four Zones. (amounts in Rs. to four Zones. (amounts in Rs. lacslacs).).



--Apportioned costs 21 26.7 30 Apportioned costs 21 26.7 30 16.916.9


as % of sales 34.6 33.2 35.2 36as % of sales 34.6 33.2 35.2 36


4.2 Costs4.2 Costs


Method # 4Method # 4-- Net Margin after distributing costs on Net Margin after distributing costs on number of number of staff basisstaff basis to four Zones. (amounts in Rs. to four Zones. (amounts in Rs. lacslacs).).



--Apportioned costs 22.2 16.6 30.5 Apportioned costs 22.2 16.6 30.5 25.325.3




4.2 Costs4.2 Costs


Method # 5Method # 5-- Net Margin after distributing costs on Net Margin after distributing costs on number of number of establishments basisestablishments basis to four Zones. (amounts in Rs. to four Zones. (amounts in Rs. lacslacs).).



--Apportioned costs 21.8 Apportioned costs 21.8 21.821.8 29.1 21.829.1 21.8

Net margin Amount 1339 1707 1914.6 1071.Net margin Amount 1339 1707 1914.6 1071.55



4.2 Costs4.2 Costs


Summary of Net Margin after Summary of Net Margin after distributingdistributing costs by five methodscosts by five methods

North East West SouthNorth East West South

1.1. Equally 34.6 33.2 35.4 35.8Equally 34.6 33.2 35.4 35.8

2.2. Sales Sales 34.6 33.2 35.3 3634.6 33.2 35.3 36

3.3. Gross margins 34.6 33.18 35.2 36Gross margins 34.6 33.18 35.2 36

4.4. Staff Staff 34.6 33.4 35.2 35.834.6 33.4 35.2 35.8

5.5. Establishments 34.6 33.3 35.3 35.9Establishments 34.6 33.3 35.3 35.9

GM as % Sales GM as % Sales 35.2 33.7 35.8 36.635.2 33.7 35.8 36.6



You would have observed that the different basis of allocation You would have observed that the different basis of allocation has resulted in the net margins at the four zones has resulted in the net margins at the four zones undergoing changes. Since the amount apportioned is undergoing changes. Since the amount apportioned is not high, the changes may seem insignificant but with not high, the changes may seem insignificant but with larger expenses they become material.larger expenses they become material.

Of these several methods of apportionment , the one based Of these several methods of apportionment , the one based in proportion to sales is the most appropriate as well as in proportion to sales is the most appropriate as well as equitable.equitable.

Further, even though gross margin rates are same for four Further, even though gross margin rates are same for four zones, South has higher gross margin rate for the zone zones, South has higher gross margin rate for the zone than others. This happens because of a better product than others. This happens because of a better product mix. Let us see how.mix. Let us see how.


4.2 Costs4.2 CostsProfitability analysis Profitability analysis –– effects of product mixeffects of product mix

Products A,B,C & D have gross margin rates of 15%, 40%, Products A,B,C & D have gross margin rates of 15%, 40%, 10% and 50% 10% and 50% respresp. Sales by Ram & . Sales by Ram & ShyamShyam for the for the month of January are as under :month of January are as under :--

Product RamProduct Ram ShyamShyamSales Gross Margin Sales Gross MarginSales Gross Margin Sales Gross Margin

A 2000 300 3000 A 2000 300 3000 450450B 3000 1200 2000 8B 3000 1200 2000 80000C 1000 100 4000 C 1000 100 4000 400400D 4000 2000 D 4000 2000 20002000 10001000

Total 10,000 3600Total 10,000 3600 11,000 265011,000 2650ShyamShyam has higher sales but earned lesser gross margins as has higher sales but earned lesser gross margins as

he sold more of A & C which had lower margin rates.he sold more of A & C which had lower margin rates.



Conclusion:Conclusion:

Sales teams should not only sell more, but also Sales teams should not only sell more, but also concentrate on selling more of products that concentrate on selling more of products that

have a have a higher gross margin.higher gross margin.



By apportioning common expenses over Products, it is By apportioning common expenses over Products, it is necessary to determine net margins earned by each necessary to determine net margins earned by each product category. product category.

From gross margins of the product category, apportioned From gross margins of the product category, apportioned common expenses are deducted and net margins common expenses are deducted and net margins arrived.arrived.

We have thus learnt that evaluation of marketing efforts both We have thus learnt that evaluation of marketing efforts both at a territory level and a product level is required and we at a territory level and a product level is required and we have seen how this evaluation is carried for Dirham. have seen how this evaluation is carried for Dirham.


4.2 Costs4.2 Costs


It is possible to evaluate centers on other yardsticks likeIt is possible to evaluate centers on other yardsticks like

Productivity of sales personnel: Productivity of sales personnel: sales or gross margins per sales or gross margins per head.head.

Expense control: Expense control: travelling expenses as % of sales.travelling expenses as % of sales.

Working capital control: Working capital control: number of days stocks and number of days stocks and receivables. Advances received from customers, receivables. Advances received from customers, expenses incurred but still to be paid etc.expenses incurred but still to be paid etc.


4.3 Summary4.3 SummaryControllable Controllable costs are those which are controllable in the costs are those which are controllable in the

hands of the cost center head.hands of the cost center head.

OpportunityOpportunity costs open up appropriate yard sticks to choose costs open up appropriate yard sticks to choose between two alternatives. Opportunity cost for working between two alternatives. Opportunity cost for working for self that is earning by self employment for self that is earning by self employment visvis a a visvisworking for another as an employee.working for another as an employee.

Incremental Incremental costs are the extra cost that is incurred in the costs are the extra cost that is incurred in the extra activity /task /input.extra activity /task /input.


That is the end of our session # 04That is the end of our session # 04Next we move to session # 04Next we move to session # 04

Covering chapter 05Covering chapter 05““ Pricing.Pricing.””

Good Luck !Good Luck !

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