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ch10.pptxChapter 10
Marketing Decisions
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© 2012 John Wiley & Sons, Ltd, Accounting for Managers, 4th edition, 978XXXXXXXXXX, Chapter X
Overview
Marketing strategy and accounting
Cost behaviour: fixed and variable costs
Cost-volume-profit analysis
Breakeven
Sales mix
Operating leverage
Alternative approaches to pricing
Segmental and customer profitability analysis
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
The Marketing function
Marketing is the business activity that aims to understand customer needs and satisfy those needs more effectively than competitors
Porter’s (1980) 5 forces
Threat of new entrants; bargaining power of customers; bargaining power of suppliers; threat of substitutes; threat from competitors
Porter’s (1985) generic strategies:
Low cost producer; higher cost producer with differentiation; focus on market niche
© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
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Marketing & accounting - 1
Accounting techniques should be consistent with and supportive of marketing strategy
product/service mix,
customer mix,
market segmentation,
value and cost drivers,
pricing, and
distribution channel
© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
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Marketing & accounting - 2
What is the volume of product/services we need to sell to maintain profitability?
What alternative approaches to pricing can we adopt?
What is our customer, product/service and distribution channel profitability in each of our market segments?
© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
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Cost behaviour
Fixed costs
Variable costs
Semi-fixed (or step-fixed) costs
Semi-variable costs
Marginal costs
Average costs
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
Cost behaviour
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
Contribution margin
The difference between sales revenue and variable cost of sales
Marginal contribution of a sale towards fixed costs & profit
Not the same as gross profit
© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
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Contribution margin & gross profit
| € | |
| Sales revenue | 400,000 |
| Less variable cost of sales | 180,000 |
| Contribution margin | 220,000 |
| Less fixed cost of sales | 130,000 |
| Gross profit | 90,000 |
© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
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Cost-volume-profit (CVP) analysis
The relationship between changes in the number of units sold, selling prices and fixed and variable costs
Relevant range
Sensitivity analysis
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
Profit formulae
Net profit = revenue – (fixed costs + variable costs)
Net profit = (units sold x selling price) – [fixed costs + (units sold x unit variable cost)]
In mathematical terms:
N = Pu – (F + Bu)
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
Breakeven
The point at which total costs equal total revenue – there is neither a profit or loss
Breakeven sales (in units) =
Fixed costs
Unit contribution
Unit contribution = selling price per unit – variable cost per unit
Breakeven sales (in £s)
Fixed costs
Unit contribution as a % of sales
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
CVP analysis
Fixed costs £200,000
Variable costs £10 per unit
Selling price £25
20,000 units
N = Pu – (F + Bu)
N = (£25 x 20,000) – [200,000 + (£10 x 20,000)]
N = 500,000 – 400,000
N = £100,000
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
Breakeven
Breakeven (in units):
Fixed costs
Selling price p.u. – variable costs p.u.
200,000
20 – 10
= 20,000 units
Breakeven (in £sales):
Fixed costs
Unit contribution as % of sales
200,000
0.5*
= £400,000
Or 20,000 units @ £20
*Unit contribution is 20 – 10 = 10
As a % of sales 10/20 = 50% or 0.5
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
Target profit (variation on breakeven)
Units to sell:
Fixed costs + Profit
Selling price p.u. – variable costs p.u.
200,000 + 150,000
20 – 10
= 35,000 units
Sales value:
Fixed costs + Profit
Unit contribution as % of sales
200,000 + 150,000
0.5*
= £700,000
Or 35,000 units @ £20
*Unit contribution is 20 – 10 = 10
As a % of sales 10/20 = 50% or 0.5
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
Breakeven chart
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
Margin of safety
A measure of the difference between the anticipated and breakeven levels of activity
Margin of safety (%)
= Expected sales – Breakeven sales x 100
Expected sales
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
Margin of safety illustration
Expected sales – Breakeven sales x 100
Expected sales
Breakeven sales 20,000 units
Anticipated sales 25,000 units
Margin of safety = 25,000 – 20,000 x 100
20,000
= 20%
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
Sales mix - 1
Three products with different volume, selling prices and variable costs
© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
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Sales mix - 2
Mix of products has changed – same sales revenue but lower contribution
© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
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Breakeven with multiple products Fixed costs €200,000
© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
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Operating leverage Two company’s sell the same product at same price with same profits. Only the mix of variable and fixed costs is different
© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
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Limitations of CVP Analysis
Volume is the only factor that causes prices and variable costs to alter
Single product/service or a product/service mix that remains constant
Costs can be accurately divided into fixed and variable elements
Fixed costs do not change
Total costs and revenues are linear
Applies only to the relevant range
Applies only to the short term, and cannot reliably be used in the longer term
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
Alternative approaches to pricing
Cost-plus pricing
Target rate of return pricing
Optimum selling price
Special pricing decisions
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
Cost plus pricing
Full cost + mark-up on cost = Selling price
£20 + (25% of £20) = £25
Margin of 20% (£5/£25)
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
Target rate of return pricing
Investment €1 million
Desired profit 12%
€120,000/20,000 units = €6 profit per unit
Cost €20 + Profit €6 = Price €26
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
Optimum selling price
Maximise profits where contribution to fixed costs and profits is highest
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
Special pricing decisions
One-off pricing (tactical decisions)
Maximise profit by recovering the variable costs and some of the fixed costs
Fixed costs do not change, irrespective of volume
Effect on competition, future selling price, and use of capacity
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
Special pricing decisions
£’000
Revenue
17,000 @ £30 510
Variable costs
17,000 @ £10 170
Contribution 340
Fixed costs 200
Net profit 140
Accepting an order of 3,000 units @ £12 will increase profits by
3,000 x (12 – 10) = £6,000
Short-term v. long-term
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
Segmental profitability & contribution
Separating fixed costs. Fixed costs may be either:
Unavoidable and allocated to market segments or business units
Typically head office (corporate) costs
Avoidable and will no longer be incurred where a market segment or business unit closes
Specific to each business segment
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
Segmental profitability
© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
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Segmental profitability
Customer profitability analysis
Understanding which customers are profitable and which are not
Reducing the costs of servicing unprofitable customers;
Increasing prices to unprofitable customers to cover those costs;
No longer doing business with unprofitable customers.
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
Customer profitability analysis - Illustration
© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
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Key points
Using accounting to help make marketing decisions
Cost behaviour and CVP analysis
Contribution, breakeven & margin of safety calculations, sales mix & operating leverage
Alternative approaches to pricing
Cost-plus, target rate of return, optimum selling price, special pricing decisions
Segmental and customer profitability
Costs may be fixed but are they avoidable or unavoidable costs?
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© 2015 John Wiley & Sons Ltd, Accounting for Managers, 5th edition, 9781119002949
