Basic Marketing: A Global Managerial Approach

Perreault−McCarthy: Basic
Marketing: A
Global−Managerial
Approach, 14/e

19. Implementing and
    Controlling Marketing
    Plans: Evolution and
    Revolution

Text © The McGraw−Hill

Companies, 2002

Implementing and Controlling Marketing Plans: Evolution and Revolution 569

The difference between the full-cost approach and the contribution-margin

approach is important. The two approaches may suggest different decisions, as we’ll

see in the following example.

Full-cost example

Exhibit 19-11 shows a profit and loss statement, using the full-cost approach, for

a department store with three operating departments. (These could be market seg-

ments or customers or products.)

The administrative expenses, which are the only fixed costs in this case, have

been allocated to departments based on the sales volume of each department. This

is a typical method of allocation. In this case, some managers argued that Depart-

ment 1 was clearly unprofitable and should be eliminated because it showed a net

loss of $500. Were they right?

To find out, see Exhibit 19-12, which shows what would happen if Department

1 were eliminated.

Several facts become clear right away. The overall profit of the store would be

reduced if Department 1 were dropped. Fixed costs of $3,000, now being charged

to Department 1, would have to be allocated to the other departments. This would

reduce net profit by $2,500, since Department 1 previously covered $2,500 of the

$3,000 in fixed costs. Such shifting of costs would then make Department 2 look

unprofitable!

Contribution-margin example

Exhibit 19-13 shows a contribution-margin income statement for the same

department store. Note that each department has a positive contribution margin.

Here the Department 1 contribution of $2,500 stands out better. This actually is the

The two approaches

can lead to different

decisions

Exhibit 19-11 Profit and Loss Statement by Department

Totals Dept. 1 Dept. 2 Dept. 3

Sales $100,000 $50,000 $30,000 $20,000

Cost of sales 80,000 45,000 25,000 10,000

Gross margin 20,000 5,000 5,000 10,000

Other expenses:

Selling expenses 5,000 2,500 1,500 1,000

Administrative expenses 6,000 3,000 1,800 1,200

Total other expenses 11,000 5,500 3,300 2,200

Net profit or (loss) $ 9,000 $ (500) $ 1,700 $ 7,800

Exhibit 19-12 Profit and Loss Statement by Department if Department 1 Were Eliminated

Totals Dept. 2 Dept. 3

Sales $50,000 $30,000 $20,000

Cost of sales 35,000 25,000 10,000

Gross margin 15,000 5,000 10,000

Other expenses:

Selling expenses 2,500 1,500 1,000

Administrative expenses 6,000 3,600 2,400

Total other expenses 8,500 5,100 3,400

Net profit or (loss) $ 6,500 $ (100) $ 6,600