Chapter 2

Financial Aspects of Marketing Management

Variable and Fixed Costs

Variable Costs
 uniform per unit of output, within a time frame
 fluctuate in proportion to output

Fixed Costs
 remain constant within a time frame
 per unit cost decreases with increase in output
 programmed costs (e.g., marketing expenses)
 committed costs
Relevant and Sunk Costs

Relevant Costs
 occur in the future
 differ among alternatives being considered

Sunk Costs
 occurred in the past
 mostly irrelevant to future decisions
 sunk cost fallacy
Gross Margin

Total Gross Margin Dollar Amount Percentage

Net Sales $100 100%

Cost of Goods Sold - 40 - 40

Gross Profit Margin $ 60 60%

Unit Gross Margin

Unit Sales Price $1.00 100%

Unit Cost of Goods Sold - 0.40 - 40

Unit Gross Profit Margin $0.60 60%

Trade Margin

Suppose a retailer purchases an item for $10

and sells it at $20.

Retailer Margin as a percentage of cost is:

$10 / $10 x 100 = 100 percent

Retailer Margin as a percentage of selling price is:

$10 / $20 x 100 = 50 percent

 Trade Margin

Gross Margin as
Unit Cost of
Unit Selling Price a Percentage of
Goods Sold
Selling Price

Manufacturer $2.00 $2.88 30.6%

Wholesaler 2.88 3.60 20.0

Retailer 3.60 6.00 40.0

Consumer 6.00
Contribution Analysis

Break-even point is the unit or dollar sales at which an

organization neither makes a profit nor a loss.

At the organization’s break-even sales volume:

Total Revenue = Total Cost

 Contribution Analysis

Break-even Analysis

total dollar fixed cost

Unit break-even volume =
unit price - unit variable cost

unit selling price - unit variable cost

Contribution Margin =
unit selling price
 Break-even Analysis Chart

Dollars Total Revenue

BE Point
Profit Total Cost

Variable Cost

Fixed Cost
Loss

0 Unit Volume
Applications of Contribution Analysis


Sensitivity Analysis


Profit Impact


Market Size


Performance Measurement


Assessment of Cannibalization