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University of Washington EMBA Program Regional 20. “Quantitative Analysis for Marketing” T.A.: Rory McLeod . Basic Quantitative Analysis for Marketing. Fixed, Variable, and Total Cost. Total Cost. Cost. k = variable cost per unit. Fixed Cost. Volume (Quantity). V.

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university of washington emba program regional 20
University of Washington EMBA ProgramRegional 20

“Quantitative Analysis for Marketing”

T.A.: Rory McLeod

fixed variable and total cost
Fixed, Variable, and Total Cost

Total Cost

Cost

k = variable cost per unit

Fixed Cost

Volume (Quantity)

V

Total Cost for output level V units = fixed cost + k*V

As you produce more units, the average cost per unit goes down (fixed

costs are spread out over more units).

example safeco field tickets
Example: Safeco Field Tickets

Fixed cost = $40,000,000

(player/manager/staff salaries, overhead, etc.)

Variable cost per seat sold (k) = 400

(shipping of tickets, custodial staff, maintenance, etc.)

Total # of seats = 46,000

If all seats are sold, variable costs are $18,400,000.

Total cost 58,400,000.

Total cost per seat if all seats are sold 1,270

If only half of the seats are sold, the total cost per unit is ___, because the fixed costs of $40,000,000 are only covered by sale of 23,000 seats.

(These are made up figures!)

unit contribution and total contribution
Unit Contribution and Total Contribution

Unit Contribution = P – k (P = price charged)

Total Contribution = (P – k) * V = PV– kV

= Price charged minus variable costs.

This is what you have left over to cover your fixed costs and profit.

safeco field ticket contribution at 2500 price
Safeco Field Ticket Contribution at $2500 Price

Assume season tickets are sold for $2500 on average.

Unit contribution = $2500 - $400 = $2,100

Total contribution, assuming all 46,000 seats are sold

= $2100 * 46,000 = $96,600,000

This tells us that after fixed costs of $40,000,000, we will

have a profit of $56,600,000.

If only half of the seats are sold, our total contribution

= $2100*23,000 = $48,300,000, leaving us with

a profit of $8,300,000

safeco field ticket contribution at 2000 price
Safeco Field Ticket Contribution at $2000 price

Assume season tickets are sold for $2000 on average.

Unit contribution = $2000 - $400 = $1600

Total contribution, assuming all 46,000 seats are sold

= $1600 * 46,000 = $73,600,000

This tells us that after fixed costs of $40,000,000, we will

have a profit of $33,600,000.

If only half of the seats are sold, our total contribution

= _________________ leaving us with

a ______________.

margin financial people like to confuse you
Margin(Financial people like to confuse you!)

$ Margin = Selling price – variable cost

(In this case, Margin is the same as unit contribution)

Beware, margin can often mean different things. Make sure you have clarification of the specific elements included.

% Margin = (Selling price – variable cost) / Selling price * 100% (this shows the % as a whole number instead of a decimal)

break even volume bev

$

Volume (Units)

Break – Even Volume (BEV)

Total Revenue (Price * V)

Total Cost (Fixed Cost + k*V)

BEV

break even volume bev11
Break – Even Volume (BEV)
  • BEV is the point at which
  • Total Revenue = Total Cost
  • Or said differently, you are at break even
  • when Price * V = Fixed cost + (k*V)
  • BEV = Fixed cost / (Price – k)
        • Or more simply
  • BEV = Fixed cost / Unit contribution
application of break even analysis to advertising expenditure
Application of Break Even Analysis to Advertising Expenditure

Example.

An advertising campaign costing $500,000 has been proposed

for Safeco tickets with a unit contribution of $1,600. How many

additional seats will need to be sold as a result of the campaign

in order to justify its costs?? How many at $2,100?

$500,000 / $1600 per seat = 313 seats

$500,000 / $2100 per seat = 238 seats

What if the proposed campaign cost $2,000,000? How many seats

would we have to sell to break even at $1,600/seat and $2,100/seat?

it is important to remember
It is important to remember…
  • Numbers have more meaning when there is a benchmark against which to compare them.
    • Market size
    • Growth rate
    • Competitive activity
  • For example, if we determine that we need to sell 78,125 units of a product to break even…
  • What does this mean for a product that is part of a
    • highly competitive, stable market with 150,000 units sold annually
  • vs.
    • an emerging, fast-growing market with 1,000,000 units sold annually.
market potential
Market Potential
  • Market potential (Demand) = potential # of buyers * average quantity purchased by a buyer * price

Potential buyers are the people for whom your product is a solution to their need. It is not a function of your manufacturing capacity.

company demand forecast
Company Demand Forecast
  • Company Demand Forecast (Potential): the amount of sales of the market potential you believe you can capture, relative to that of competitors.
    • E.g. if you have a superior product, you will have a higher demand forecast than if your competitors’ products were superior.
  • Company Sales Forecast: expected level of company sales based on a chosen marketing plan– this reflects your efforts to take advantage of the company demand forecast.
forecasting methods
Forecasting Methods
  • 3-stage procedure: prepare a macroeconomic forecast (based on expected inflation, unemployment, interest rates, consumer spending, etc.), followed by an industry forecast, followed by a company sales forecast
  • Based on what people say:
    • Survey of buyers’ intentions/needs
    • Composite of sales force opinions
    • Expert opinion
  • Put the product into a test market and measure buyer response
  • Analyze records of past buying behavior and use a statistical method of projecting this behavior into the future
business objectives
Business Objectives
  • Profit (Revenue – Total Cost)
  • Market Share
    • Specify share of what market (global, national, regional, etc.)
    • Dollars vs. %
  • Revenues
  • Growth
  • Return on Investment (ROI)

= net income / total investment * 100%

  • Return on Equity (ROE)

= net income / owners’ equity * 100%

  • Return on Assets (ROA)

= net income / total assets * 100%