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Quantitative Analysis Review

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					Quantitative Analysis
Review
Market Share Analysis
   Market Share Analysis tells you what proportion
    of the “market” (in terms of unit or $$ sales) your
    brand or firm controls.
   Formula for Market Share:
                 Salesi ( in units or $$)
    MS i 
           Total Market (or Segment ) Sales
   Note that market share is always expressed as:
    –   A proportion (e.g. .25)
    –   Or as a percentage (e.g. 25%)
Market Share Analysis
   Under what conditions are within-segment market
    shares more important than overall market share?
   Important points:
     – Market share doesn’t take costs/profit into
       account
     – Can have high share, low profit firm/brand
     – Market share is a comparative statistic
        Mostuseful when analyzed within the context of the
         competitive environment.
    Financial Analysis - Contribution
    Margins
   Contribution Margin - Formulas:


Total CM = Total Sales -- Total Variable Costs
Unit CM = Selling Price -- Unit Variable Cost

   Contribution Margin tells you how much is left over,
    after accounting for variable costs to go towards fixed
    expenses and profit.
 Contribution Margin
   Contribution can also be expressed as a percentage of
    total sales, or the selling price:

Total CM % = Total Sales -- Total Variable Costs
                         Total Sales
Unit CM% = Selling Price -- Unit Variable Cost
                         Selling Price
 Expressing CM as a percentage tells you: What
  percentage of every dollar I earn in sales goes
  towards covering fixed expenses and profits.
    Contribution Margin
 Example: If CM% = 35%, then 35% or 35 cents out of
  every dollar you earn in sales goes toward covering
  fixed expenses and profit.
 Handy relationship:
100% = Variable Costs as + Contribution Margin
         as a % of sales (price) as a % of sales (price)
 Example: if VC = 30% of sales, then CM = 70% of
  sales
 Contribution Margin is probably the most important
  financial ratio used in marketing. Why?
 Profit Margin
 Formula for profit margin:
 PM =Total Sales - Total VC - Total Fixed Costs
 Like CM, PM can be expressed as a % of sales:


PM% = Total Sales - Total VC - Total Fixed Costs
                    Total Sales
 Like CM, PM% tells you what percentage of
     every dollar you earn represents pre-tax profit.
Break-Even Analysis

   Very important marketing tool. Used for:
    –   New product feasibility
    –   New marketing strategy feasibility
    –   Target profit pricing
    –   Sensitivity Analysis
   Combined with market share, firms can
    determine their required break-even market
    share.
    Break-even Analysis

   Basic Formulas:
BE (units) =                Total Fixed Costs
                      Unit Price - Unit Variable Cost
BE ($$) =                  Total Fixed Costs
                        Contribution Margin %

   Simple example of decision making based on break-
    even analysis:
Example - Break-even Analysis
   Firm A has estimated that demand for a new
    technology in the innovators segment will be
    200,000 units next year, and they wish to enter
    this segment. They have determined:
     – Sales Promotion =          $ 875,000
     – Advertising =              $4,000,000 $5,175,000
     – Sales Reps =               $ 300,000
     – COGS (variable cost) =     $110 per unit
     – Price to Retailers =       $230.00 per unit
Example (Continued)
 What is the break-even point in units?
BE Units =         $5,175,000 = 43,125 units
                   $230 - $110
 What is the break-even point in dollars?
BE $$ Sales =     $5,175,000      = $9,918,750
               ($230 - $110)/230
 What is the required break-even market share?
BE market share = 43,125 units = 21.56 %
                    200,000 units
Example - Analyzing the Results
 If all competitors have a 15% share, is this venture
  feasible?
 Suppose 15% is the highest market share that Firm
  A can achieve. What is the lowest price they can
  charge and still break-even?
.15 x 200,000 = 30,000 units which is the BE in units
30,000 =      $5,175,000 or, Price = $282.50
                P - $110
 What would this price mean to the consumer if
  retailers take a 33% markup?
Example (Continued)
   $230.00 vs. $282.50 Assuming a 33% markup:

.33 =     Retail Price - $230 so, Price = $343
            Retail Price

.33 =    Retail Price - $282.50 so, Price = $422
               Retail Price
The higher trade price results in a $79 dollar price
  increase at the retail level!
Breakeven Analysis and Profit
Goals
   Formula for BE volume (units):
      Unit BE Volume =
                     Fixed Cost ($) + Profit Goal ($)
                         Contribution per unit ($)
   Formula for BE volume ($):
      $$ BE Volume =
                     Fixed Cost ($) + Profit Goal ($)
                         Contribution margin
   What if the profit goal is a % of sales?
     Markup Analysis and Price
     Chains
   Markup = Unit price - unit cost, so at various channel
    levels:
    –   Retail Markup = Retail Price – Retail COGS
    –   Wholesale Markup = Wholesale Price – Wholesale COGS
    –   Manufacturer Markup = Manf. Price – Manf. Variable Costs
   Relationships:
    –   1 level channel: Manf. Price = retail COGS
    –   2 level channel: Manf price = wholesale COGS
                         Wholesale Price = Retail COGS
Formulas
   Formula for dollar markup:
      $ Markup = Selling Price - COGS

   Formula for percentage markup:
       % Markup = Selling Price - COGS
                            Selling Price
   Notice that these formulas are the same as our
    formula for contribution margin.
Markup vs. Margins
   Retailers vs. Manufacturers

   Markup on price vs. markup on cost.

   Markup on price is used in order to calculate price
    chains - Markup on cost is strictly an internal
    calculation.
Importance of Price Chains
   In the real world, manufacturers MUST have an
    idea of the retail price of their products:
    –   Competition
    –   Price sensitivity in target market
   Many marketing strategies impact margins
    (markups) such as price promotion.
   Sensitivity analysis
    Handy Formulas

   When you know COGS (i.e., variable costs) at one
    level of the channel, you can determine PRICE at
    that level using the formula:
       PRICE = COGS / (1 - Markup %)

   So, if COGS (i.e. variable costs) were $5.00 and the
    markup was 20%, then the selling price would be:
      Price = $5.00 / (1 - .20) = $5.00 / .80 = $6.25
Handy Formulas

   When you know PRICE at one level, you can
    determine COGS at that same level:
        COGS = Price x (1 - Markup)

   So, if Price = $5.00 and the Markup is 20%, COGS
    would be:
     COGS = $5.00 x (1 - .20) = $5.00 x .80 = $4.00
Handy Formulas
   Both formulas are simply algebraic manipulations
    of the formula:

       Markup % = Price - Cost
                       Price
  Price Chain - Example 1

Retail Price         $37.04 Manf. Price     $25
Retail COGS          $27.78 Manf. VC         $10
Retail Markup        $9.26 Manf. Margin     $15
Retail Markup %       25% Manf. Margin%      60%
Wholesale Price      $27.78
Wholesale COGS       $25.00 Working UP the Chain:
Wholesale Markup     $ 2.78 Price = COGS (i.e. VC)
Wholesale Markup %   10%             1 - Markup%
  Price Chain - Example 2

Retail Price          $80 Manf. Price       $54.00
Retail COGS          $60.00 Manf. VC        $27.00
Retail Markup         $20 Manf. Margin $27.00
Retail Markup %      25% Manf. Margin%         50%
Wholesale Price      $60.00
Wholesale COGS       $54.00 Going DOWN the chain:
Wholesale Markup     $ 6.00 COGS = Price x (1 - MU%)
Wholesale Markup %    10%
Final Note Concerning Markups

   Markups work on a per - unit basis (as in previous
    examples) or for a given product market.
   Example:
        Suppose retail sales = $500,000, with retailers
    taking a 25% markup. What total revenue figure
    does this represent to the manufacturers?
    Total Manufacturer $$ = $500,000 x (1 - .25)
                             = $500,000 x .75 = $375,000

				
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posted:11/21/2012
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Lingjuan Ma Lingjuan Ma
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