Relevant Information and Decision Making: Marketing Decisions

1. Relevant Informationand Decision Making:Marketing Decisions 8

2. Relevant Costs and Revenues Relevant Costs or Revenues • The predicted future costs or future revenues that differ among the alternatives being considered • Historical costs are not by themselves relevant; historical data are useful only in that they may help predict future events • Examples: special sales orders, deleting / adding products or departments, optimal use of limited resources, make of buy decisions, sell or process further decisions

3. Accuracy and Relevance • Ideally one would like relevant and accurate information • However decision makers must weigh the extra cost of obtaining more accurate information, against the benefit which the increased accuracy offers

4. Decision Processand Role of Information Historical Information Other Information Collect relevant information Use the information as a basis for predicting the future Make a decision based on the quantitative and qualitative information Chosen action is implemented and evaluation of performance is main source of feedback Prediction Method Feedback Decision Model Implementation & Evaluation

5. Special Sales Order • special one-time order from a customer at a reduced price With No Special Order Special Order Relevant revenue: 100,000 @ $13.00 $1,300,000 $0 Relevant costs: 100,000 @ $12.00 (1,200,000)0 Incremental income $100,000 $0

6. Deleting or Adding Products or Departments • special decision to add or delete a product line or department Keep Drop Grocery Grocery Difference Relevant revenue: $1,900 $1,000 $900 Relevant costs: Variable costs 1,420 800 620 Fixed costs (avoidable) 265150115 Incremental income $215 $50 $165

7. Optimal Use of Limited Resources • when something constrains or limits operations • labour hours, machine hours, raw material, space • determine contribution margin per the limiting factor • allocate usage to maximum profit • Silver Gold • Contribution margin per unit $12.00 $27.00 • Units per hour 30 10 • Contribution margin per hour $360.00 $270.00 • allocate capacity to “Silver” up to expected demand, and then allocate remaining capacity to “Gold”

8. Pricing Decisions Price is a function of • cost • elasticity of demand • competitors actions • marketing considerations • business strategy When relating cost to price always consider the diversity in costs among the various products Variable Costs Mark-Up 52.67% Contribution Approach Variable Costs Fixed Costs Mark-Up 5.26% Absorption Approach

9. Target Pricing & Target Costing Traditional Approach • Determine costs and add on a mark-up to set selling prices Target Costing and Target Pricing • First determine the price at which the product will sell • Then design a product to be produced at a low enough cost to provide an adequate profit margin over target cost Costs Mark-Up Price + = Target Price Target Costs Margin - =

10. “Cost-Plus” • Often the basis for target prices • The size of the “plus” depends on target (desired) operating outcomes • Target prices can be based on a host of different markups based on a host of different definitions of cost • There are many ways to arrive at the same target price