Basic Marketing: A Global Managerial Approach

Perreault−McCarthy: Basic

Marketing: A

Global−Managerial

Approach, 14/e

20. Managing Marketing’s
    Link with Other Functional
    Areas

Text © The McGraw−Hill

Companies, 2002

594 Chapter 20

situation, different allocations and even different accounts may be sensible—but

these work here.

Allocating functional cost to customers

Now we can calculate the profitability of the company’s three customers. But we

need more information before we can allocate these functional accounts to cus-

tomers or products. It is presented in Exhibit 20-4.

Exhibit 20-4 shows that the company’s three products vary in cost, selling price,

and sales volume. The products also have different sizes, and the packaging costs

aren’t related to the selling price. So when packaging costs are allocated to products,

size must be considered. We can do this by computing a new measure—a packaging

unit—which is used to allocate the costs in the packaging account. Packaging units

adjust for relative size and the number of each type of product sold. For example,

Product C is six times larger than A. While the company sells only 10 units of Prod-

uct C, it is bulky and requires 10 times 6, or 60 packaging units. So we must allocate

more of the costs in the packaging account to each unit of Product C.

Exhibit 20-4 also shows that the three customers require different amounts of sales

effort, place different numbers of orders, and buy different product combinations.

Jones seems to require more sales calls. Smith places many orders that must be

processed in the office, with increased billing expense. Brown placed only one

order—for 70 percent of the sales of high-valued Product C.

Exhibit 20-5 shows the computations for allocating the functional amounts to

the three customers. There were 100 sales calls in the period. Assuming that all

calls took the same amount of time, we can figure the average cost per call by divid-

ing the $1,000 sales cost by 100 calls—giving an average cost of $10. We use similar

reasoning to break down the billing and packaging account totals. Advertising dur-

ing this period was for the benefit of Product C only—so we split this cost among

the units of C sold.

Calculating profit and loss for each customer

Now we can compute a profit and loss statement for each customer. Exhibit 20-6

shows how each customer’s purchases and costs are combined to prepare a statement

Exhibit 20-4 Basic Data for Cost and Profit Analysis Example

Number of Sales Relative

Selling Units Sold Volume “Bulk” Packaging

Products Cost/Unit Price/Unit in Period in Period per Unit “Units”

A $ 7 $ 10 1,000 $10,000 1 1,000

B 35 50 100 5,000 3 300

C 140 200 10 2,000 6 60

1,110 $17,000 1,360

Number of Number of

Number of Each

Sales Calls Orders Placed

Product Ordered in Period

Customers in Period in Period A B C

Smith 30 30 900 30 0

Jones 40 3 90 30 3

Brown 30 1 10 40 7

Total 100 34 1,000 100 10