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?

<p>They are generally considered less risky. (C)</p> Signup and view all the answers

What distinguishes fixed marketing costs from variable marketing costs?

<p>Fixed costs do not change with sales revenue, while variable costs do. (B)</p> Signup and view all the answers

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

<p>Total sales commissions (A)</p> 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?

<p>It may reduce overall sales expenses based on sales performance. (A)</p> Signup and view all the answers

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

<p>Total Revenue (D)</p> Signup and view all the answers

What does a high contribution margin indicate about a product?

<p>It contributes more towards covering fixed costs. (A)</p> Signup and view all the answers

Which of the following best defines variable costs?

<p>Costs that fluctuate with sales and production volume. (B)</p> Signup and view all the answers

How is marketing spending as a percentage of sales calculated?

<p>(Marketing Spending $ / Revenue $) X 100 (C)</p> Signup and view all the answers

Which statement accurately describes fixed costs?

<p>They can sometimes behave as stepped costs. (A)</p> 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?

<p>A higher percentage of marketing spending relative to revenue. (D)</p> Signup and view all the answers

What does the total contribution margin measure?

<p>Total sales minus variable costs. (A)</p> Signup and view all the answers

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

<p>It emphasizes the influence on variable costs and revenue. (D)</p> Signup and view all the answers

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

<p>Reduce variable costs. (D)</p> Signup and view all the answers

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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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