Week 5 Marketing Costs & Budgets and Contribution Margin

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Questions and Answers

What is the formula for calculating Total Marketing Costs?

Total Mktg Costs = Total Revenue + Total Fixed Mktg Costs

Total Mktg Costs = Total Variable Marketing Costs / Total Revenue

Total Mktg Costs = Total Fixed Mktg Costs - Total Var.Mktg Costs

Total Mktg Costs = Total Fixed Mktg Costs + Total Var.Mktg Costs (correct)

Which of the following is an example of a fixed marketing cost?

Coupon printing

Sales force commissions

Cost of loyalty points programs

Marketing salaries (correct)

How do variable marketing costs typically behave in relation to revenue?

They increase or decrease with changes in revenue. (correct)

They influence fixed costs significantly.

They remain constant regardless of revenue.

They are calculated based on the number of units sold.

What is the primary advantage of strategies with variable marketing costs?

They are generally considered less risky. Signup and view all the answers

What distinguishes fixed marketing costs from variable marketing costs?

Fixed costs do not change with sales revenue, while variable costs do. Signup and view all the answers

Which of the following components is included in the calculation for total variable marketing costs?

Total sales commissions Signup and view all the answers

What is the consequence of hiring a sales broker who charges a commission on sales for Nature's Best Jams?

It may reduce overall sales expenses based on sales performance. Signup and view all the answers

What does the variable marketing cost percentage depend on in the formula for Total Variable Marketing Costs?

Total Revenue Signup and view all the answers

What does a high contribution margin indicate about a product?

It contributes more towards covering fixed costs. Signup and view all the answers

Which of the following best defines variable costs?

Costs that fluctuate with sales and production volume. Signup and view all the answers

How is marketing spending as a percentage of sales calculated?

(Marketing Spending $ / Revenue $) X 100 Signup and view all the answers

Which statement accurately describes fixed costs?

They can sometimes behave as stepped costs. Signup and view all the answers

What would indicate that a company is marketing more intensely in its Canadian Division compared to the U.S. Division?

A higher percentage of marketing spending relative to revenue. Signup and view all the answers

What does the total contribution margin measure?

Total sales minus variable costs. Signup and view all the answers

Which option best describes how contribution margin format can be beneficial?

It emphasizes the influence on variable costs and revenue. Signup and view all the answers

What could be a strategic action to improve contribution margin per unit of Product D?

Reduce variable costs. Signup and view all the answers

Study Notes

Marketing Costs

Marketing costs are calculated using the basic Total Cost equation: Total Costs = Total Fixed Costs + Total Variable Costs
Total Variable Marketing Costs are calculated using Total Revenue, not quantity in units.
Total Marketing Costs are calculated as: Total Mktg Costs = Total Fixed Mktg Costs + Total Var.Mktg Costs
Total Variable Marketing Costs are calculated as: Total Var.Mktg Costs = (Revenue $ X Variable Mktg Cost %)
Variable Marketing Costs are more likely to change with the monetary value of the units sold than the unit value of the units sold.
Examples of Fixed Mktg Costs: Sales force salaries, marketing salaries, ad development and media buys, in-store display materials
Examples of Variable Mktg Costs: Sales force commissions, off-invoice trade allowances, cost of "save xx%" promotions, cost of loyalty points programs
For a typical 1-year time period: Fixed Mktg Costs do not change with Revenue, while Variable Mktg Costs do.
Strategies with Variable Mktg Costs are considered less risky than strategies with Fixed Mktg Costs.

Fixed Mktg Costs

Fixed costs may not always be constant but "stepped" costs.
Stepped costs are fixed to a point, but beyond that point additional costs will be incurred. An example is employees' monthly cell phone airtime that is billed at a flat rate for a certain number of minutes per month and then at a per-minute rate above that.

Variable Mktg Costs

Variable costs may not always be a constant percentage of sales.
Examples: Tiered retailer performance agreements, discounts for some customers, sales force commissions paid only on sales above quota

Marketing as a Percentage of Sales

Marketing as a Percentage of Sales = (Mktg Spending /Revenue / Revenue /Revenue) X 100
This metric can be used to compare strategies over time, across product lines and company divisions, and to competitors.

Contribution Margin

Contribution Margin is the portion (amount) of sales revenue that is beyond (left over after) variable costs
It is the portion (amount) of sales revenue that is not taken (used up) to cover variable costs.
It is used to cover fixed costs and provide net income.
Contribution Margin per Unit and Total Contribution Margin are commonly used by managers to review revenues and expenses.

Contribution Margin Format

Contribution Margin Format allows marketers to focus on what they can influence on the route to profitability: revenue & variable costs.

Contribution Margin per Unit, in $ =

Contribution Margin per Unit, in $ = Selling Price per unit in –Variablecostperunitin – Variable cost per unit in –Variablecostperunitin
Contribution Margin per Unit, in % = Contribution Margin per Unit in /SellingPriceperUnitin / Selling Price per Unit in /SellingPriceperUnitin X 100

Total Contribution Margin (CM) $

Total Contribution Margin, in $ = # of Units Sold X Contribution Margin per Unit in $
Total Contribution Margin, in $ = Total Revenue – Total Variable Costs
Total Contribution Margin, in % = Total Contribution in /TotalSales / Total Sales /TotalSales X 100

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Description

This quiz covers the fundamentals of marketing costs, focusing on the Total Cost equation and the differences between fixed and variable marketing costs. It provides examples and methods to calculate total marketing expenses, helping you understand how these costs impact overall revenue. Perfect for students and professionals looking to enhance their marketing finance knowledge.