MARKETING DECISIONS 119
expected sales−breakeven sales
expected sales× 100 =
£700, 000 −£652, 000
£700, 000
Segmental profitability is the result of avoidable variable costs and fixed costs that
are segment-specific and an allocation of unavoidable business-wide fixed costs.
It is important to differentiate these costs in decision-making. We will return to
the cost allocation problem in Chapter 11.
The following case study shows how an understanding of financial information
can assist more directly in carrying out the marketing function.
Case study: SuperTech – using accounting information to win sales
One of Global Enterprises’ target customers is SuperTech, a high-technology
company involved in making semiconductors for advanced manufacturing capa-
bilities. SuperTech has grown rapidly and its sales are £35 million per annum.
Variable costs consume about 60% of sales and fixed selling, distribution and
administrative expenses are about £10 million, leaving a profit of £4 million. The
challenge facing SuperTech is to continue to grow while maintaining profitability.
It plans to achieve this by continuing to re-engineer its production processes to
reduce the lead time between order and delivery and improve the yield from its
production by improving quality.
Global sees SuperTech as a major customer for its services. However, it operates
in a highly price-competitive industry. Global is unwilling to reduce its pricing
because it has a premium brand image and believes that it should be able to use its
customer knowledge, including published financial information, to increase sales
and justify the prices being charged. Global believes that its services can contribute
to SuperTech’s strategy of reducing lead time and improving yield.
Global has been able to ascertain the following information from the published
accounts of SuperTech:
žIts cost of sales last year was £21 million and its inventory was £17.5 million.
This is because the equipment made by SuperTech is highly technical and
requires long production lead times.
žEmployment-related costs for the 250 employees were £8 million, 25% of the
total business costs of £31 million.
žThe company has borrowings of £14.5 million, its gearing being 90%, and
interest costs last year were £787,000.
We need to make a number of assumptions about the business, but these are
acceptable in order to estimate the kind of savings that Global’s services might
obtain for SuperTech.
We can calculate that the company’s cost of production, assuming 240 working
days per year, as £90,000 per day (£21.6 million/240). Given the low number of
employees and the knowledge that many of these are employed in non-production
roles, the vast majority (over 80%) of production costs are believed to be material
costs. Using the inventory days ratio (see Chapter 7), we can calculate that the