BASIC QUANTITATIVE ANALYSIS FOR MARKETING BY Iatr01990 BASIC QUANTITATIVE ANALYSIS FOR MARKETING BASIC TERMINOLOGY Simple calculations often help in making quality marketing decisions. If we are to assess the likely profit consequences of alternative actions, we must understand the cost associated with doing business as well. We can calculate the expected revenue generated by each pricing strategy, but without cost information, it is not possible to determine the preferred price. The cost concepts we introduce are:- Variable cost Fixed cost Total cost
We combine the cost information with price information to determine unit contribution and total contribution. This Figure is a good enough approximation of actual cost behaviour Total cost 0 The total cost line (the solid line) does not go through the origin, i. e. , for a zero output level, total cost is not zero. Fixed cost 0 We call OA the firm’s “fixed costs. ” Fixed costs are those costs which do not vary with the level of output. An example of a fixed cost is the lease cost of a plant. Variable cost 0 The variable cost increases as output increases.
TOTAL COST = FIXED COST + TOTAL VARIABLE COST Contribution Unit contribution = PriceUnit (P) – Variable costUnit (VB) Total contribution = (P – VB) * Total number of units the firm sells Total contribution = Total revenue – Total variable cost Price*Total number Variable cost unit*Total number of unit sells of unit sells The total contribution is the amount available to the firm to cover (or continued to) fixed cost and profit after the variable cost has been deducted from total revenue. Example: Let’s solidify our understanding of these definitions by working through he video cassette tape pricing problem.
Suppose the unit variable cost k is $4; tnen assumlng tne sales Torecasts pnce = $5 Unit contribution Tor eacn prlce level given aoove are correct: -$1 Total contribution per week * Tot. number of unit sells = * 1,000 units/week= 1 . ooomeeks pnce = $6 = $6- $4-$2 Total contribution per week = $2/unit * 700 units/week pnce = $7. 50 = $7. 50 – $4=$3. 50 = 1. 400/weeks Total contribution per week = $3. 50/unit *600 units/week =2. 100/weeks Since, by definition, the fixed cost associated with each output level is the same, the firm is best off by charging $7. 0 since of the three possible prices $7. 50 maximizes the total contribution.
MARGIN CALCULATIONS The term “margin” is sometimes used interchangeably with “unit contribution” for a manufacturer. Margin is also used to refer to the difference between the acquisition price and selling price ofa good for a member of the channels of distribution. For example, consider Figure D, in which we have the videocassette tape manufacturer selling through a wholesaler, who in turn sells to retailers, who then sell to the public. Each of the three members of the channel of distribution(manufacturer, holesaler, retailer) performs a function and is compensated for it by the margin it receives.
RETAILER’S PERCENT= SELLING PRICE MARGIN TO CONSUMERS PURCHASE PRICE FROM WHOLESALER SELLING PRICE TO CONSUMERS RETAILER’S DOLLAR MARGIN Note that in the denominator of Equation, we have the selling price to consumers. It would have been as logical to put purchase price from wholesaler there instead. It is only by convention that we divide by the selling price. For any member of the channel, we will always compute “its percentage margin by dividing its dollar margin by the price at which it sells the goods.
BREAK-EVEN VOLUME The BEV is the volume at which the firm’s total revenues equal total cost; below BEV, the firm has a loss; above BEV, the firm shows a profit. How many units must be sold to cover cos ts-??? we can ootaln tne answer Dy arawlng a total revenue line as In Hgure F. The point at which the total revenue line cuts the total cost is BEV. BEV = FIXED COST / (PRICE – UNIT VARIABLE COST) = FIXED COST / UNIT CONTRIBUTION BEV can be of help in making decisions about unit contribution (through price or variable cost changes) or the appropriate level of fixed costs for a business.