Financial aspect strategic

marketing
Lecture 19th FEB 2019-- 3rd Wk
 Variable & fixed cost
The marketing managers are responsible for the impact of
their actions on profits and cash flow therefore they need
to know the basic concepts of accounting and finance.
costs are two types
a) Variable costs - Expenses that are uniform per unit of
output during a budget year. This cost vary in direct
proportion to the output volume of unit produced.
Two categories
( 1) cost of goods sold- directly applied to production
Materials, labor, overhead directly applied to production
(2) expenses not charged directly to production but vary
with volume as-sales commission, discounts and delivery
expenses
 Variable & fixed cost
(b) Fixed costs-the expenses that do not vary with output
volume within a budget period but become progressively
smaller per unit of output as volume increases. The
absolute size of fixed costs remain unchanged. Total fixed
costs do not change during a budget period regardless of
changes in volume.
Two categories
(1) programmed costs- these generally emerge from
attempts to generate sales volume. Marketing exp.-
advertising , sales promotion, sales salaries
(2) committed costs-these required to maintain the
organization- usually non- mktg. exp. as rent ,
administrative and clerical salaries
 Relevant and sunk costs
• Relevant costs-these are the future expenditures
occur as a result of some marketing decisions.
Adding a new product to a product mix. These
are potential exp. Of manufacturing and
marketing. In general these are opportunity
costs-the foregone benefits from an alternative
not chosen.
• Sunk costs- past expenditures for a given activity
and are irrelevant in whole or part to future
decisions, last yr advertisement exp, past
research and development exp.
 margins
It is the difference between selling price and
cost of a product or service.

i. Gross margin- difference of total sales revenue

and total cost of goods/service sold.
ii. Trade margin- difference of unit sales price and
unit cost of at each level of marketing level.
iii. Net profit(before taxes) margin=
Net sales- (cost of goods sold-selling exp.-fixed exp)
 Contribution analysis
a. Contribution is a difference between total sales revenue
and total variable costs or ( on per unit basis it is the
difference between unit selling price and unit variable
cost .)
Types of analysis
(1) Break-even analysis-
it is a point where
(a) Total revenue= total variable costs+ total fixed costs.
(b) It identifies a point where sales volume of an organization in term of unit
or rupee neither makes a profit nor incurs a loss.
Unit break-even(volume)= total fixed costs/ (unit selling price—unit
variable cost)
Unit break-even (Rs)= total fixed costs/ contribution margin
Contribution margin= unit selling price—unit variable cost/unit selling price
 Break-even analysis
Q-1 Unit selling price =Rs5/-
Unit variable cost = Rs2/-
Total fixed cost RS30000/-
Find out= contribution margin, break-even
unit volume, break-even Rs volume?
Q-2 Unit selling price =Rs4/-
Unit variable cost = Rs1.50/-
Total fixed cost RS40000/-
Find out= contribution margin, break-even
unit volume, break-even Rs volume?
 Setting profit goal
Q-3 How many units must be sold to achieve a profit of Rs, 20000/- if
selling price =Rs 25/- ,
variable cost= Rs10/-
Fixed cost=Rs 200,000/-
Q-4 A tooth past company intends to introduce a gel large pack and an
economy small pack. Large pack selling unit price Rs 1000/ & unit
variable cost Rs 500/.the economy selling unit price is Rs 500/ and
unit variable cost Rs 300/. The co expect to sell 3 small pack and
one large pack with a marketing programmed expenditures Rs
825000/ which is a fixed cost. Find out the unit break-even volume
for each category of pack. Further what volume in each category
will be needed if co. wants to earn Rs 200000/ profit in large pack
and Rs 150000/ profit in small pack.
 Performance based analysis
Prodct X Product Y Total
10,000 volume 20,000 volume 30,000volume
RS RS RS
Unit price 10 3
Sales reveue 100,000 60,000 160,000
Unit vareable cost 4 1.5
Total variable cost 40,000 30,000 70,000
Unit contribution 6 1.5
Total contribution 60,000 30,000 90,000
Fixed cost 45,000 10,000 55,000
Net profit 15,000 20,000 35000
Should a manager
look only at net
profit?
 Assessment of cannibalization
• Cannibalization is the process by which one
product or service sold by a firm gains a
portion of its revenue by diverting sales from
another product or service also sold by the
same firm.
• Problem facing a marketing person to assess
the financial effect of cannibalization.
 Existing white New Gel
toothpaste( Brand-X ) Toothpaste( Brand- Y)

Unit selling price Rs 01.00 Rs 1.10

Unit variable cost 0.20 0.40

Unit contribution 0.80 0.70

Sales X=1,000,000 unit Expected sales=1,000,000 units
Cannibalized effect 50%

Q-How introduction of
new Gel past will affect
brand X total
contribution?
 liquidity
• An organization’s ability to meet financial
obligations-usually within a budgeted year.
Since the timing of marketing expenditures and
sales volume is often lagged until and unless sales
is against advance cash, a marketing manager
must consider his marketing efforts that
unnecessarily effect org. liquid resources –
working capital i.e. cash, a/c receivable, prepaid
expenses, inventory.
 Operating leverage
• Operating leverage refers to the extent to which fixed costs
and variable costs are used in the production and
marketing of products and services.
• Firms having high total fixed costs relative to total variable
costs are defined having high operating leverage- air lines,
heavy equipment manufacturers.
• Firms having low total fixed costs relative to total variable
costs are defined having low operating leverage- residential
contractors, wholesale distributors
• Higher operating leverage, the faster total profit once sales
exceed break-even and losses at faster rate if sales fall
below break-even point.
 Discounted cash flow
 These are the future cash flows expressed in
term of their present value.
 It reflects the theory of time value of money-
use of money has a value reflected by risk ,
inflation, and opportunity cost.
 From a decision-making perspective, an
investment should be accepted if the net present
value of its return is positive and rejected if it is
negative
 Customer lifetime value
• CLV- is the present value of future cash flows arising from a
customer relationship.
• The estimated CLV sets upper bound for how much a co.
would be willing to pay to attract and retain a customer.
• CLV calculation require 3 types of information
i. per period(month or year) cash margin($M) per
customer(sales volume- variable costs and other
expenditures necessary to keep the customer)
ii. The retention rate(r) –per period probability that
customer will be retained.
iii. The interest rate(i) used for discounting future cash flows
iv. CLV=$M(1/ 1+I-r) –AC whereas AC is the acquisition cost
 Pro forma income statement
• Marketing managers are accountable for the profit
impact of their actions, they must translate their
strategies and tactics into projected income,.
• A pro forma income statement displays projected
revenues, budgeted expenses, estimated net profit,
product or services during planning period, sales
forecast and a set of variable and fixed costs.
• Major categories to which a mktg. mngr. should be
familiar—Sales(forecasted), Cost of Goods sold, Grass
Margin, MKTG. Expenses, General and administrative
expenses, Net income before taxes
 Exception

Financial analysis of marketing actions is a

necessary but insufficient criterion for
justifying marketing programs