Strategic Marketing Problems

Marketing managers are accountable for the impact of their actions on

profit and cash flow. Therefore, they need a working knowledge of basic

accounting and finance concepts. This chapter provides an overview of

several concepts from accounting and finance that are useful in marketing

management:(1) variable and fixed costs, (2) relevant and sunk costs, (3) margins,

(4) contribution analysis, (5) liquidity, (6) operating leverage, (7) discounted cash

flow, and (8) customer lifetime value analysis. In addition, considerations when

preparing pro forma income statements are described.

■ VARIABLE AND FIXED COSTS

An organization's costs divide into two broad categories: variable costs and fixed

costs.

Variable Costs

Variable costs are expenses that are uniform per unit of output within a relevant time

period (usually defined as a budget year); yet total variable costs fluctuate in direct

proportion to the output volume of units produced. In other words, as volume

increases, total variable costs increase.

Variable costs are divided into two categories, one of which is cost of goods sold.

For a manufacturer or a provider of a service, cost of goods sold covers materials,

labor, and factory overhead applied directly to production. For a reseller (wholesaler

or retailer), cost of goods sold consists primarily of the cost of merchandise. The second

category of variable costs consists of expenses that are not directly tied to production

but that nevertheless vary directly with volume. Examples include sales

commissions, discounts, and delivery expenses.

Fixed Costs

Fixed costs are expenses that do not fluctuate with output volume within a relevant

time period (the budget year) but become progressively smaller per unit of output as

volume increases. The decrease in per-unit fixed cost results from the increase in the

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Strategic Marketing Problems: Cases and Comments, Eleventh Edition, by Roger A. Kerin and Robert A. Peterson.

Published by Prentice Hall. Copyright © 2007 by Pearson Education, Inc.

number of output units over which fixed costs are allocated. Note, however, that no

matter how large volume becomes, the absolute size of fixed costs remains unchanged.

Fixed costs divide into two categories: programmed costs and committed costs.

Programmed costs result from attempts to generate sales volume. Marketing expenditures

are generally classified as programmed costs. Examples include advertising,

sales promotion, and sales salaries. Committed costs are those required to maintain

the organization. They are usually nonmarketing expenditures such as rent and

administrative