Marketing Finance Independence` ` ``

Finance

Functions

The purpose of financial accounting is to summarize financial activity of the business in

the profit and loss statement, balance sheet and cash flow statement. Accounting records
and bookkeeping are the basis of your businesss financial accounting.

Financial accounting dictates the amounts you owe to suppliers, what customers owe you,
operating costs, payroll costs and available cash. You can use financial accounting to
analyze significant aspects of your business, such as monthly sales or the reasons for high
expenses in one month. Sound financial records demonstrate financial controls and
oversight that reduce the risk of fraud and theft, something that investors like to see.

Financial accounting helps you formulate your future course of action or strategy and
measure the success of this strategy with the financial information produced from another
period.

Marketing Functions

Gathering and Analysing Market Information

Marketing Planning

Product Designing and Development

Standardisation and Grading

Packaging and Labelling

Branding

Customer Support Service

Pricing of Products

. Promotion

Physical Distribution

Transportation

Storage or Warehousing

Advertising

Marketing Finance Interdependence

The Key functions of a business are:

Operations- involves organising the production of goods and services

Employment Relations- responsible for organising the business's huma
n resources - the people who work in the business.
Marketing- the link between the business and its customers.
Accounting and Finance - responsible for providing the financial resour
ces necessary to run the business.
The business functions are interdependent and work together to achieve
the objectives of the business.

Conceptual Framework of Financial

Performance

Financial performance depends on revenue and cost.

Revenue is provided from sales of merchandise by retailers, sales of products

and sale of services.

Companies generate three types of costs including discretionary, engineered

and committed costs.

Various costs fall into one of these three categories based on the cause and
effect relationships involved.

These three cost concepts are summarized in next slides.

* Cause and effect relationship A relationship in which one event makes another
event happen.

Discretionary Cost

A discretionary cost is a cost or capital expenditure that can be curtailed or even eliminated in the
short term without having an immediate impact on the short-term profitability of a business.

Management may reduce discretionary costs when there are cash flow difficulties, or when it
wants to present enhanced short-term earnings in the financial statements. However, a prolonged
period of reduction in discretionary costs gradually reduces the quality of a company's product
pipeline, reduces awareness by customers, increases machine downtime, and may also decrease
product quality and increase employee turnover. Thus, discretionary costs are actually only
discretionary in the short-term, not the long-term.

Many activities are viewed as beneficial to an organization, even though the benefits obtained or
value added by performing these activities cannot be defined precisely , either before or after the
activity is completed.The costs of the inputs, or resources required to perform such activities are
referred to as discretionary costs.

These costs are discretionary in the sense that management must choose the desired level of the
activity based on intuition or experience .

Examples includes employee training, advertising, sales promotion, legal advice, Employee training
Equipment maintenance, Quality control, Research and development, Building Maintenance etc.

Engineered costs

Engineered costs result from activities with reasonably well defined cause and effect
relationships between inputs and outputs and costs and benefits.

Engineers can specify precisely how many parts (inputs) are required to generate a specific
output.

Engineered cost are committed at the design stage of a product like direct material and direct
labour. Once the design is final, engineered cost are strictly proportional to the output
volume. Managers will focus mostly on efficiency or productivity.

Characteristics of Engineered cost

1. Inputs can be measured in Monetary terms.

2. Outputs can be measured in physical terms.

3. The optimal amount of input required to produce one unit of output can be established.

Engineered cost is basically a manufacturing cost, warehousing cost, distribution cost.

In an engineered expense center, the Quantity multiplied by the standard cost or each unit
produced represents what the finished products have the cost. When these cost is compared
to actual cost , the difference between the two represents the efficiency of the organization
unit being measured.

E.g. Direct Material cost per unit, Direct labor per unit, Manufacturing ohs per unit etc.

Committed costs

Committed costs refers to the costs associated with establishing and maintaining the readiness
to conduct business. It has been committed by Management

The benefits obtained from these expenditures are represented by the company's infrastructure.

A committed cost is an investment that a business entity has already made and cannot recover
by any means, as well as obligations already made that the business cannot get out of it. You
should be aware of which costs are committed costs when you are reviewing company
expenditures for possible cutbacks or asset sales. Committed cost will continue even if an
organization shuts down for a short time

For example, if a company buys a machine for $40,000 and also issues a purchase order to pay
for a maintenance contract for $2,000 in each of the next three years, all $46,000 is a committed
cost, because the company has already bought the machine, and has a legal obligation to pay for
the maintenance. A multi-year property lease agreement is also a committed cost for the full
term of the lease, since it is extremely difficult to terminate a lease agreement.

There is usually a long-term legal agreement associated with a committed cost. If not, it is much
easier to negotiate the termination of an expense.

Examples 1. the costs associated with the purchase of a franchise, a patent, copy rights.

2. The cost of facilities and top management- These cost can not be eliminated without exposing
an organizations overall health and existence.

Marketing ROI

It is different from Corporate ROI. because marketing is not the same kind of
investment

It is basically a relationship between Net Marketing Margin (NMM) and Investment in

Marketing Operation.

Here manufacturing and marketing department are two different profit center so
performance measurement will be separate.

So amount of total costs and revenue have to be kept differently.

Instead of money that is 'tied' up in plants and inventories (often considered capital
expenditure or CAPEX), marketing funds are typically 'risked.' Marketing spending is
typically expensed in the current period (operational expenditure or OPEX). The idea
of measuring the markets response in terms of sales and profits is not new, but terms
such as marketing ROI and ROMI are used more frequently now than in past periods.
Usually, marketing spending will be deemed as justified if the ROMI is positive.

The purpose of ROMI is to measure the degree to which spending on marketing

contributes to profits. Marketers are under more and more pressure to show a return on
their activities.

Construction
Return on Marketing Investment (ROMI) =
[Incremental Revenue Attributable to Marketing ($) X Contribution Margin (%)
Marketing Spending ($)] /Marketing Spending ($)
A necessary step in calculating ROMI is the estimation of the incremental sales attributable to marketing.
These incremental sales can be 'total' sales attributable to marketing or 'marginal.'
Short term
The first, short-term ROMI, is also used as a simple index measuring the dollars of revenue
(or market share, contribution margin or other desired outputs) for every dollar of marketing spend.
For example, if a company spends $100,000 on a direct mail advertising and it delivers $500,000 in
incremental revenue, then the ROMI factor is 5.0. If the incremental contribution margin for that $500,000
revenue is 60%, then the margin ROMI (the incremental margin for $100,000 of marketing spent is
$300,000 (= $500,000 x 60%). Of which, the $100,000 spent on direct mail advertising will be subtracted
and the difference will be divided by the same $100,000 . Every dollar expended in direct mail advertising
translates an additional $2 on the company's bottomline.

COSTVOLUME PROFIT ANALYSIS

CVP ANALYSIS

Cost Volume profit analysis means any analysis to study the effect or impact on cost and
profit of changes in volume, and vice versa.

It helps to ascertain the financial performance at a given level of sales.

It helps to know the break even level for an organization where total revenue equalize the
total cost.

Change

Impact/Effect

In fixed cost: a) Increase

BE units- Increase
Cont/Sales ratio- Same
MOS Decrease
The reverse of above

b) Decrease
In variable cost a) Increase
b) Decrease
In sale price: a) Increase

b) Decrease
In sales Unit a) Increase
b) decrease

BE units- Increase
Cont/Sales ratio- decrease
MOS Decrease
The reverse of above
BE units- decrease
Cont/Sales ratio- Increase
MOS Increase
Profit - Increase
The reverse of above
Margin of Safety and profit Increase
Margin of Safety and profit decrease

Assumptions;

Fixed cost remain static & marginal costs are completely variable at all levels of output.

Selling prices are constant at all sales volume.

Factor prices (raw material, Labor etc) are constant at all sales volume .

Efficiency and productivity remain unchanged. In a multi product situation ,there is

constant sales mix at all level of sales.

Turnover level is only relevant factor affecting cost & revenue

ELEMENTS

MARGINAL COST EQUATION

CONTRIBUTION MARGIN .

PROFIT /VOLUME RATIO .

BREAK EVEN POINT .

MARGIN OF SAFETY.

MARGINAL COST EQUATION

SALES=VARIABLE COSTS +FIXED
EXPENSES+P/L
OR
S-V=F+P/L

CONTRIBUTION MARGIN-

CONTRIBUTION =SELLING PRICE MARGINAL COST

OR
C=F+P/L
OR
C-F=P/L

PROFIT /VOLUME RATIO;

P/V= CONTRIBUTION x 100
Sales
OR
P/V ratio =CHANGE IN PROFITS OR CONTRIBUTION
CHANGE IN SALES

x 100

Break Even Point

Break even point(in units)= Fixed cost
Contribution per unit

;Break even point(in Amt)= Fixed cost

P/V ratio

VALUE OF SALES TO EARN DESIRED

AMOUNT OF PROFIT ;
Calculations of sales for desired profit
Required sales = Fixed cost+ Desired profit
P/V ratio
Required sales (units)= Fixed cost + Desired profit
Contribution per unit

MARGIN OF SAFETY ;

margin of safety(Rs) = Actual Sales - Sales at B.E.P Or

=

Profit
p/v ratio

Margin of safety (units)=Actual sales(units)- B.E.P. (units)

Or

Profit

Contribution per unit

Assignment 1

ABC Ltd has provided the following information

Sales @ Rs. 5 per unit.- 20000 units

Variable cost p.u.-Rs.3

Fixed Cost Rs.8000

Calculate PV Ratio and Break even sales.

Assignment 2

Following data is given by XYZ Ltd.

Sales @ Rs 10 pu -100000 Units

Variable cost per unit Rs.6

Fixed cost 300000

Calculate Margin of safety.

Assignment 3

A company producing a single product sells it at Rs.50pu . Unit variable cost is

Rs.35 and fixed cost is Rs.1200000.

Find out Break Even Sales and P/V ratio.

New break even sales if variable cost increase by Rs.3 pu without increase in
selling price.

Volume of sales required to earn a profit of Rs.2.4 lakh

Assignment 4
Ridewell Cogcle Ltd purchases 20000 bells per annum from an outside supplier
at Rs.5 each. The Management feels that these be manufactured and not
purchased. A machine costing Rs. 50000 will be required to manufacture the
item within the factory. The machine has an annual capacity of 30000 units and
life of 5 years. The following additional information is available

Material cost per bell will be Rs. 2.00

Labor cost per bell will be

Variable overheads

You are required to advise whether

I. The company should continue to purchase the bells from the outside
supplier or should make them in the factory

II the company should accept an order to supply 5000 bells to the market at
a selling price of Rs. 4.50 per unit ?

Rs. 1.00

100% of labor cost

Assignment 5

A company has annual Fixed cost of Rs. 1400000. In 2004 sales amounted to
Rs. 6000000 as compared with Rs. 4500000 in 2003 and profit in 2004 was Rs.
420000 higher than in 2003. a) At what level of sales does the company break
even ?

b) Determine profit or loss on a present sales volume of Rs. 8000000

c) If there is reduction in selling price in 2005 by 10% and the company desires to
earn the same profit as in 2004, what would be the required sales volume ?

Assignment 6
Material cost 120 Labour Cost 30 Overhead is 12
Selling price 270
Fixed cost 14 lakhs
Sales 40.5 lakhs.
During forthcoming year direct workers will be entitled a rise in 10%
Material cost will rise by 7.5% and overhead by 5%
Fixed cost will rise by 3%
Find New sales price in the forthcoming year if current P/V ratio is to be
maintained.
Number of units that would require to be sold during the forthcoming year to
have the same amount of profit in the current year without increasing the
selling price.

Assignment 7

The following data refer to a single product , the techwhiz, made by the Markdata Computer
company:

Sales Price = Rs.5595

Materials cost (Including Purchased components) = Rs. 899

Direct labour cost = rs. 233

Facilities Cost = ( for a highly automated plant mainly includes rent, insurance , taxes and
Depreciation) = 2352000 per year.

Required

What is the unit contribution margin

What is the BEP in units and Amount

What is the desired level of sales unit if the company plans to increase Fixed cost by 5% and to
achieve a desired before Tax profit of Rs. 200000

If the companys income Tax rate is 22 percent what unit sales are necessary to achieve an after
tax profit of Rs. 150000

Concept of Return on Investment

ROI =

Net Profit

X 100

Capital Employed

Further Decomposed it is the multiplication of Net Profit Ratio and Capital turnover
Ratio

NPR is NP/Sales

CTR is Sales/Capital Employed

Capital Turnover Ratio indicates the efficiency of the organization with which the
capital employed is being utilized. A high capital turnover ratio indicates the capability
of the organization to achieve maximum sales with minimum amount of capital
employed. Higher the capital turnover ratio better will be the situation.

Particular

Total

NonMarketin
g

marketing

remarks

10% represents
automobiles ,warehouse,
office equipment by MKTG

Capital Employed
Fixed Asset

100

90

10

Working Capital

100

40

60

Total

200

130

70

Sales

400

320

400

320 is the transfer price of

goods from Manufacturing
to Marketing.a

- Marginal Cost

300

270

350

350 includes 320 and

another 30 are variable
marketing exp.

Contribution

100

50

50

- Fixed Cost
Operational

40

18

22

- Financial Charges

20

13

Total

60

31

29

Net Profit

40

19

21

NMM is 21.

Assignment 1

Fixed asset 100

Working Capital 100

Sales 400

Variable cost of sales 300

Fixed Cost Operation 40

Fixed cost Finance Charges 20

Calculate ROI, Contribution to Sales Ratio and Capital

Turnover Ratio, Margin of safety

Assignment 3

A company has a margin of safety at 20% and a profit of Rs.4 lakhs. If its
contribution to sales is 0.4 calculate its current sales and fixed cost.

Assignment 4

Profit /Volume ratio of a company is 50%, while its margin of safety is

40%. If sales volume of the company is Rs. 50 Lacs, find out its break
even point and net profit.

Multi Product Sales Mix

A manufacturer may have more than one product and also their
sales.

The relative proportion of each product sold in the aggregate

sales is termed as sales mix

A change in the mix of products sold usually affects the weighted

average P/V Ratio and hence the BEP

So when the product have different P/V Ratios changes in the

sales mix will affect the BEP.

Assignment

Three products X Y and Z have their sales at 100000, 60000, 40000 respectively.
Their variable costs are 80000, 42000, 24000 respectively. Fixed cost for the firm is
27000 find out the break even sales for the firm.

If Rs.40000 sales of the product X could be shifted equally to product Y and Z then
what will be the new profit and new BEP sales for the firm.

Impact of selling price, Fixed Cost and

Variable cost on BEP.

An increase in selling price increases the amount of contribution resulting in

improvement in P/V Ratio and vice versa.

The increase or decrease in fixed cost does not affect the P/V ratio even though it
may increase or decrease the total profit.

Increase in variable cost per unit will reduce the contribution and result to
decrease in P/V Ratio and vice versa.

The increase in P/V Ratio means lower break-even point and higher margin of
safety and vice versa.

Make an analysis of the below

mentioned assignment.

Selling price per unit Present Rs.50 Proposed Rs.40

Variable Cost per unit Present Rs.30 and Proposed Rs.30

Fixed Cost p.a. Rs.60000 in both arrangements.

Production units 10000 units in both the cases.

Calculate P/V Ratio Break Even Point and Margin of safety and comment on the
situations of lowering selling price per unit in the light of previous slides
discussion.

Assignment

A company wants to buy a new machine to replace one which is having a frequent
break down. It received offers for two models M1 and M2.Further details of these
two models are given below.

Installed capacity in units for M1 10000 and for M2 10000

Fixed overhead p.a. for M1 Rs. 240000 and for M2 Rs. 100000

Estimated profit at the above capacity M1 Rs 160000 and M2 Rs.100000.

The product manufactured using this type of machine M1 or M2 is sold at Rs.100

per unit.

You are required to find out the Break Even level of sales for each model.

The level of sales at which both the models will earn the profit of Rs. 200000

Assignment

The following figures relate to a company manufacturing a varied range of

product.
Total Sales

Total Cost

Year ended 31st March 2005

22,23,000

19,83,600

Year ended 31st March 2006

24,51,000

21,43,200

Assuming stability in price with variable cost carefully controlled to reflect predetermined relationship
and an unvarying figure cost calculate the following
P/V Ratio, Fixed Cost,Fixed Cost % to Sales, Break even point and margin of safety for the year ended
2005 and 2006.

Assignment

XYZ Ltd has to decide between launching one or two similar new products. It does not have the production
capacity to launch both the product. Fixed Cost for the company is Rs.20000 p.a. Product A can be sold at
Rs.400 per item and product B at Rs.350 per item. The variable unit cost are Rs.240 for Product A and
Rs.200 for product B. The likely demand for both the products are given by the following probability
distribution. Calculate the Break-even point for both the product and estimate the profitability of these two
products.

Likely Demand

Probability of A

Probability of B

100

0.1

0.3

200

0.3

0.4

300

0.4

0.2

500

0.2

0.1

Total

1.0

1.0

Practical application of Linear Programming technique

Allocation of scares resources : Limited resources to be

allocated to various products.

Product mix problems Capacity utilization optimization so

that profit can be maximized.

Determinations in joint product profitability In case of

product involving joint cost where one or more of the joint
products may be processed further. LP may help determine the
profitability of further processing.

Cost volume profit analysis for Multi product cost volume

profit analysis.

To formulate the LPP

1. Objective Functions : The objective functions of each problem is a mathematical

representation of the objective in terms of a measurable quantity such as profit,
cost, revenue etc.

It should be an optimization function either to maximize or to minimize.

2. Constraint functions : There are always certain limitations on the use of limited
resources like labour, machine, raw material etc.

Such constraints must be expressed as linear equalities or inequalities in terms of

decision variables.

The solution of an LP model must satisfy these constraints.

3. Non Negativity condition- X and Y being the no. of units produced , cannot have
negative values. Thus both of them can assume values only greater than or equal to
zero. It expressed as x > 0 and y > 0.

Guidelines for formulations

Express objective function in words.

Define the objective function whether to maximize or minimize.

Express them in mathematical terms.

Express it as a linear function of decision variables multiplied by their profit

or cost considerations.

Define decision Variables: Express each constraints in words

Formulate the constraints imposed by the resource availability and express

them in linear equality or inequality in terms of decision variables defined.

A store has requested a manufacturer to produce pants and sports jackets.

For materials, the manufacturer has 750 m 2 of cotton textile and 1,000 m 2 of
polyester. Every pair of pants (1 unit) needs 1 m 2 of cotton and 2 m2 of
polyester. Every jacket needs 1.5 m2 of cotton and 1 m2 of polyester.

The price of the pants is fixed at $50 and the jacket, $40.

What is the number of pants and jackets that the manufacturer must give to
the stores so that these items obtain a maximum sale?

Assignment

A firm is engaged in producing two products. A and B. Each

unit of product A requires 2 kg of raw material and 4 labour
hours for processing, where as each unit of B requires 3kg of
raw materials and 3 labour hours for the same type. Every
week, the firm has an availability of 60 kg of raw material and
96 labour hours. One unit of product A sold yields Rs.40 and
one unit of product B sold gives Rs.35 as profit. Formulate this
as an Linear Programming Problem to determine as to how
many units of each of the products should be produced per
week so that the firm can earn maximum profit.

Practice Problem

A small manufacturer making two products A and B

Two resources R1 and R2 are required to make these products.

Each unit of Product A requires 1 unit of R1 and 3 units of R2.

Each unit of Product B requires 1 unit of R1 and 2 units of R2.

The manufacturer has 5 units of R1 and 12 units of R2 available.

The manufacture also makes a profit of Rs. 6 per unit of Product A sold and
Rs. 5 per unit of product B sold.

Formulate this as an Linear Programming Problem to determine as to how

many units of each of the products should be produced so that the firm can
earn maximum profit.