Perreault−McCarthy: Basic
Marketing: A
Global−Managerial
Approach, 14/e- Implementing and
Controlling Marketing
Plans: Evolution and
Revolution
Text © The McGraw−Hill
Companies, 2002570 Chapter 19
amount that would be lost if Department 1 were dropped. (Our simple example
assumes that the fixed administrative expenses are trulyfixed—that none of them
would be eliminated if this department were dropped.)
A contribution-margin income statement shows the contribution of each depart-
ment more clearly, including its contribution to both fixed costs and profit. As long
as a department has some contribution-margin, and as long as there is no better use
for the resources it uses, the department should be retained.Using the full-cost approach often leads to arguments within a company.
Any method of allocation can make some products or customers appear less
profitable.
For example, it’s logical to assign all common advertising costs to customers based
on their purchases. But this approach can be criticized on the grounds that it may
make large-volume customers appear less profitable than they really are—especially
if the marketing mix aimed at the larger customers emphasizes price more than
advertising.
Those in the company who want the smaller customers to look more profitable
usually argue forthis allocation method on the grounds that general advertising
helps build good customers because it affects the overall image of the company and
its products.
Arguments over allocation methods can be deadly serious. The method used may
reflect on the performance of various managers—and it may affect their salaries and
bonuses. Product managers, for example, are especially interested in how the vari-
ous fixed and common costs are allocated to their products. Each, in turn, might
like to have costs shifted to others’ products.
Arbitrary allocation of costs also may have a direct impact on sales reps’ morale.
If they see their variable costs loaded with additional common or fixed costs over
which they have no control, they may ask, “What’s the use?”
To avoid these problems, firms often use the contribution-margin approach.
It’s especially useful for evaluating alternatives and for showing operating
managers and salespeople how they’re doing. The contribution-margin
approach shows what they’ve actually contributed to covering general overhead
and profit.
Top management, on the other hand, often finds full-cost analysis more useful.
In the long run, some products, departments, or customers must pay for the fixed
costs. Full-cost analysis has its place too.Exhibit 19-13 Contribution-Margin Statement by Departments
Totals Dept. 1 Dept. 2 Dept. 3Sales $100,000 $ 50,000 $30,000 $ 20,000
Variable costs:
Cost of sales 80,000 45,000 25,000 10,000
Selling expenses 5,000 2,500 1,500 1,000
Total variable costs 85,000 47,500 26,500 11,000
Contribution margin 15,000 $ 2,500 $ 3,500 $ 9,000
Fixed costs
Administrative expenses 6,000
Net profit $ 9,000Contribution-margin
versus full-cost—
choose your side