Chapter 15

Ways to increase order size

-Educate customers who buy from several different suppliers -Stress advantage of ordering once a month rather than once a week -Educate sales force -Establish minimum order size -Establish minimum charge or a service charge for small orders

Methods used to allocate indirect costs:

1. Divide costs equally among territories 2. Allocate costs in proportion to sales volume obtained from each territory; If product A accounts for 25% of sales, then A is charged with 25% of indirect expense 3. Allocate indirect costs in same proportion as the total direct costs; if product A accounts for 25% of total direct costs, then A would be charged with 25% of indirect expenses also

ROAM =

CM/District sales volume x direct sales volume/ average acc. rec. + inventory

Contribution Margin Method

COGS Direct expenses CM After deducting direct costs from the gross margin, remainder is indirect expense

Full-Cost Method

COGS Direct expenses Indirect expenses Net Profit All costs are allocated to determine net profit

Problems in MCA

Can be expensive in time, money and personnel Difficult to determine how to allocate indirect costs Direct costs--personal selling Indirect costs--Administration (shared, salary)

PCA

Cost is a function of volume c = f(v)

Marketing Cost Analysis

Detailed study of firm's marketing costs Not usually part of a company's regular accounting system Volume is a function of cost: V= f(c)

Activity Expenses

Involves identifying the major activities associated with the firm's marketing program Then dividing ledger expense so that it is appropriately allocated into various activities Mapping back

Types of MCAs

Ledger Expenses Activity Expenses Activity Costs by Market Segments

Return on investment =

Net Profit/Sales x Sales/Investment

Leger Expenses

Simplest and least expensive Examines costs as they are recorded in the company's accounting ledgers; provides general information Past tense, historic (score by quarter

Activity Costs by Market Segments

Studies costs and profitability of each segment of the market (territories, product class, customer)