# 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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 views: 7 posted: 11/21/2012 language: English pages: 24
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