Basic Questions on the Operating Statement

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Presentation transcript:

Basic Questions on the Operating Statement Ted Mitchell

Price P 97 Variable Cost V 21.28 Advertising Ad 340000 Inputs Price P 97 Variable Cost V 21.28 Advertising Ad 340000 Consumer Promotion Cp Sales Force Sf 720000 Dealer Promotion Dp 930000 Research 150000 Product Development 600000 Sales Volume 86065 units Competitors 10 firms Size of Market Qi 708,213 units

Sales Revenue =R = PQ = 97(86065) 8,348,305 CoGS = VQ = 21.28(86065) 1,831,463 Gross profit = G = R-CoGS 6,516,842 Markup =Mp = G/R 78.06% Total Promotion = T 2,330,000 Promotion to Sales = T/R 27.91% NMC or Zap 4,186,842 R&D 750,000 Net Profit Z 3,436,842 ROS = Z/R 41.17% Market Share = Q/Qi 12.5%

Speedy Shoe can maintain its current costs and sales volume in the next period but it wants to improve its net profit. It has a goal to increase its ROS by an additional 5% over its current ROS percentage. What price must be charged for Speedy shoe to achieve its targeted return on sales? The new selling price per unit is ________________.

Speedy Shoe can maintain its current costs and sales volume in the next period but it wants to improve its net profit. It has a goal to increase its ROS by an additional 5% over its current ROS percentage. What price must be charged for Speedy shoe to achieve its targeted return on sales? The new selling price per unit is ________________.

What is the current ROS? 41.17% What is the desired ROS? 41.17% + 5% = 46.47% What is the formula you learned in Mkt 210 for calculating a selling price when you have a target return on sales? Price = (Average Cost per Unit) / (1-ROS)

Price = (Average Cost per Unit) / (1-ROS) What is the current ROS? 41.17% What is the desired ROS? 41.17% + 5% = 46.47% What is the formula you learned in Mkt 210 for calculating a selling price when you have a target return on sales? Price = (Average Cost per Unit) / (1-ROS)

What is the current ROS? 41.17% What is the desired ROS? 41.17% + 5% = 46.47% What is the formula you learned in Mkt210 for calculating a selling price when you have a target return on sales? Price = (Average Cost per Unit) / (1-ROS) Price = (Average Cost per Unit) / (1-0.4617) Need to know the average cost per unit or BEP?

What is the average cost per unit or BEP? BEP = (Total Cost) / Units Sold BEP = (R-Z)/Q = 4,911,463/86,065 BEP = $57.07

What is the average cost per unit or BEP? BEP = (Total Cost) / Units Sold BEP = (R-Z)/Q = 4,911,463/86,065 BEP = $57.07 Solve for Price Price = (Average Cost per Unit) / (1-ROS) Price = $57.07 / (1-0.4617) Price = $106.02

Speedy Shoe can maintain its current costs and sales volume in the next period but it wants to improve its net profit. It has a goal to increase its ROS by an additional 5% over its current ROS percentage. What price must be charged for Speedy shoe to achieve its targeted return on sales? The new selling price per unit is ________________. $106.02

Two Points You can NOT just memorize the formula Know where it comes from! You can N0T just learn the mechanics of the solution. Know why you are doing it!

Two Points This is why we need Mkt316 You can NOT just memorize the formula Know where it comes from! You can N0T just learn the mechanics of the solution. Know why you are doing it!

Why are you doing it? Your Boss wants it. BUT WHY! Cost based prices are benchmarks Cost based pricing formula sets the stage for discussions on profitable pricing strategy ROS is a central measure of the firm’s operating efficiency

Where did it come from? Price = (Average Cost per Unit) / (1-ROS) Price = BEP /(1-ROS)

Sales Revenue =R = PQ = 97(86065) 8,348,305 CoGS = VQ = 21.28(86065) 1,831,463 Gross profit = G = R-CoGS 6,516,842 Markup =Mp = G/R 78.06% Total Promotion = T 2,330,000 Promotion to Sales = T/R 27.91% NMC or Zap 4,186,842 R&D 750,000 Net Profit Z 3,436,842 Desired ROS = Z/R 46.17% Market Share = Q/Qi 12.5%

Sales Revenue =R = PQ = 97(86065) 8,348,305 CoGS = VQ = 21.28(86065) 1,831,463 Gross profit = G = R-CoGS 6,516,842 Markup =Mp = G/R 78.06% Total Promotion = T 2,330,000 Promotion to Sales = T/R 27.91% NMC or Zap 4,186,842 R&D 750,000 Net Profit Z = ROS(R) 3,436,842 Desired ROS = Z/R 46.17% Market Share = Q/Qi 12.5%

Sales Revenue =R = PQ = 97(86065) 8,348,305 CoGS = VQ = 21.28(86065) 1,831,463 Gross profit = G = R-CoGS 6,516,842 Markup =Mp = G/R 78.06% Total Promotion = T 2,330,000 Promotion to Sales = T/R 27.91% NMC or Zap 4,186,842 R&D 750,000 Net Profit Z = ROS(R) = ROS(PQ) 3,436,842 Desired ROS = Z/R 46.17% Market Share = Q/Qi 12.5%

Sales Revenue =R = PQ = 97(86065) 8,348,305 CoGS = VQ = 21.28(86065) 1,831,463 Gross profit = G = R-CoGS 6,516,842 Markup =Mp = G/R 78.06% Total Promotion = T 2,330,000 Promotion to Sales = T/R 27.91% NMC or Zap 4,186,842 R&D 750,000 Desired Net Profit Z = ROS(R) = ROS(P)(Q) Desired ROS = Z/R 46.17% Market Share = Q/Qi 12.5%

Sales Revenue =R = PQ = 97(86065) 8,348,305 CoGS = VQ = 21.28(86065) 1,831,463 Gross profit = G = R-CoGS 6,516,842 Markup =Mp = G/R 78.06% Total Promotion = T 2,330,000 Promotion to Sales = T/R 27.91% NMC or Zap 4,186,842 R&D 750,000 Desired Net Profit Z = ROS(R) = ROS(P)(Q) Desired ROS = Z/R 46.17% Market Share = Q/Qi 12.5% The Total Costs

Revenue Sales Revenue =R = PQ = 97(86065) 8,348,305 CoGS = VQ = 21.28(86065) 1,831,463 Gross profit = G = R-CoGS 6,516,842 Markup =Mp = G/R 78.06% Total Promotion = T 2,330,000 Promotion to Sales = T/R 27.91% NMC or Zap 4,186,842 R&D 750,000 Desired Net Profit Z = ROS(R) = ROS(P)(Q) Desired ROS = Z/R 46.17% Market Share = Q/Qi 12.5% The Total Costs

Revenue Profit Sales Revenue =R = PQ = 97(86065) 8,348,305 CoGS = VQ = 21.28(86065) 1,831,463 Gross profit = G = R-CoGS 6,516,842 Markup =Mp = G/R 78.06% Total Promotion = T 2,330,000 Promotion to Sales = T/R 27.91% NMC or Zap 4,186,842 R&D 750,000 Net Profit Z = ROS(R) = ROS(P)(Q) Desired ROS = Z/R 46.17% Market Share = Q/Qi 12.5% The Total Costs Profit

Basic Profit Equation Profit = Revenue -Total Cost Revenue = Total Cost + Profit Let Revenue = PQ PQ = Total Cost + Profit P = (Total Cost)/Q + Profit/Q We know have to solve for the price, P

Basic Profit Equation Profit = Revenue -Total Cost Revenue = Total Cost + Profit Let Revenue = PQ PQ = Total Cost + Profit P = (Total Cost)/Q + Profit/Q We know we have to solve for the price, P

We know we have to solve for the price, P P = (Total Cost)/Q + (Desired Profit)/Q We know Total Cost/Q = average cost per unit or BEP Desired Profit = ROS(P)(Q) Substitute what we know P = BEP + ROS(P)(Q)/Q P = BEP + ROS(P) P - ROS(P) = BEP P (1-ROS) = BEP P = BEP/ (1-ROS)

We know we have to solve for the price, P P = (Total Cost)/Q + (Desired Profit)/Q We know Total Cost/Q = average cost per unit or BEP Desired Profit = ROS(P)(Q) Substitute what we know P = BEP + ROS(P)(Q)/Q P = BEP + ROS(P) P - ROS(P) = BEP P (1-ROS) = BEP P = BEP/ (1-ROS)

We know we have to solve for the price, P P = (Total Cost)/Q + (Desired Profit)/Q We know Total Cost/Q = average cost per unit or BEP Desired Profit = ROS(P)(Q) Substitute what we know P = BEP + ROS(P)(Q)/Q P = BEP + ROS(P) P - ROS(P) = BEP P (1-ROS) = BEP P = BEP/ (1-ROS)

The pricing equation We memorized in Mkt210 We know have to solve for the price, P P = (Total Cost)/Q + (Desired Profit)/Q We know Total Cost/Q = average cost per unit or BEP Desired Profit = ROS(P)(Q) Substitute what we know P = BEP + ROS(P)(Q)/Q P = BEP + ROS(P) P - ROS(P) = BEP P (1-ROS) = BEP P = BEP/ (1-ROS) The pricing equation We memorized in Mkt210

Why we are in Mkt 316! You can NOT just memorize the formula Know where it comes from! You can N0T just learn the mechanics of the solution. Know why you are doing it!

Why we are in Mkt 316 To learn something in this course takes a lot of time and a lot of effort You can NOT just memorize the formula Know where it comes from! You can N0T just learn the mechanics of the solution. Know why you are doing it!