Costs that do not vary with production or sales level.
Costs that vary directly with the level of production.
The sum of the fixed and variable costs for any given level of production.
Cost-Plus Pricing (Markup Pricing)
A standard markup to the cost of the product.
Unit Cost =
Variable Cost + (Fixed Costs / Unit Sales)
Costs that will occur in the future that will vary across the alternatives being considered.
The price at which total revenue equals total cost and profit is zero.
Markup Price =
Unit Cost / (1 – Desired Return on Sales)
The difference between a company’s selling price for a product and its cost to manufacture and purchase it.
Return on Investment (ROI) Pricing (Target-Return Pricing)
A cost-based pricing method that determines price based on a specified rate of return on investment.
ROI Price =
Unit Cost + (ROI * Investment / Unit Sales)
Dollar Markup =
Selling Price – Cost
Markup Percentage on Cost =
Dollar Markup / Cost
Markup Percentage on Selling Price =
Dollar Markup / Selling Price
Offering just the right combination of quality and good service at a fair price.
The sequence of markups used by firms at each level in a channel.
Analysis to determine the unit volume and dollar sales needed to be profitable given a particular price and cost structure.
Break-Even Volume =
Fixed Costs / (Price – Unit Variable Cost)
The amount that each unit contributes to covering fixed costs – the difference between price and variable costs.
Break-Even Sales =
Break Even Volume * Price
Contribution Margin =
The unit contribution divided by selling price.
(Price – Variable Cost) / Price
(Total Sales – Total Variable Costs) / Total Sales
Unit Volume =
(Fixed Cost + Profit Goal) / (Price – Variable Cost)
(Fixed Cost + Profit Goal) / Contribution Margin
Total Market Demand
The total volume that would be brought by a defined consumer group in a defined geographic area in a defined time period in a defined marketing environment under a defined level and mix of industry marketing effort.
Q = n * q * p
Q = Total market demand
n = Number of buyers in the market
q = Quantity purchased by an average buyer per year
p = Price of an average unit
The upper limit of market demand.
Chain Ratio Method
Estimating market demand by multiplying a base number by a chain of adjusting percentages.
Pro Forma (or Projected) Profit-and-Loss Statement (or Income Statement or Operating Statement)
A statement that shows projected revenues less budgeted expenses and estimates the projected net profit for an organization, product, or brand during a specific planning period, typically a year.
Profit-and-Loss Statement (Income Statement or Operating Statement)
A statement that shows actual revenues less expenses and net profit for an organization, product, or brand during a specific planning period, typically a year.
The ratios of selected operating statement items to net sales.
Gross Margin Percentage =
The percentage of net sales remaining after cost of goods sold – calculated by dividing gross margin by net sales.
Gross Margin / Net Sales
Net Profit Percentage =
The percentage of each sales dollar going to profit – calculated by dividing net profits by net sales.
Net Profit / Net Sales
Operating Expense Percentage =
The portion of net sales going to operating expenses – calculated by dividing total expenses by net sales.
Total Expenses / Net Sales
Inventory Turnover Rate (Stockturn Rate) =
The number of times an inventory turns over or is sold during a specified time period (often one year) – calculated based on costs, selling price, or units.
Cost of Goods Sold / Average Inventory at Cost
Return on Investment (ROI) =
A measure of managerial effectiveness and efficiency – net profit before taxes divided by total investment.
Net Profit Before Taxes / Investment
Net Marketing Contribution (NMC) =
A measure of marketing profitability that includes only components of profitability controlled by marketing.
Net Sales – Cost of Goods Sold – Marketing Expenses
Marketing Returning on Sales (Marketing ROS) =
The percent of net sales attributable to the net marketing contribution – calculated by dividing net marketing contribution by net sales.
Net Marketing Contribution / Net Sales
Marketing Return on Investment (Marketing ROI) =
A measure of the marketing productivity of a marketing investment – calculated by dividing net marketing contribution by marketing expenses.
Net Marketing Contribution / Marketing Expenses
Increase in Sales =
Increase in Fixed Cost / Contribution Margin
Workload Method =
An approach to determining sales force size based on the workload required and the time available for selling.
To determine the sales force size:
NS = (NC * FC * LC) / TA
NS = Number of salespeople
NC = Number of customers
FC = Average frequency of customer calls per customer
LC = Average length of customer call
TA = Time an average salesperson has available for selling per year
Current Total Contribution =
Contribution Margin * Sales
The situation in which one product sold by a company takes a portion of its sales from other company products.