12 Cost Analysis McGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

12-2  Select appropriate cost allocation method for various sales management situations  Describe how to implement methods  Discuss importance of (ROAM) and calculate  Apply financial cost analyses to sales management situations to make decisions

Customer Lifetime Value Analysis  Determine real costs associated with each customer  Some portion of overhead  Salesperson’s time  Customer service contact  Sales terms  Payment schedules  Largest customers may not be most profitable  Allows companies to assign resources strategically

12-4 Cost Analysis Development  Sales managers need accurate knowledge of profitability of  Customers  Geographic areas  Products  Three approaches  Full costing  Contribution analysis  Activity-based costing (ABC)

12-5 Full Cost vs. Contribution Margin  Full-cost (net profit) - many of the indirect costs can be assigned on the basis of a demonstrable cost relationship  Contribution margin - direct product costs identified associated with revenue to yield a true Gross Profit

Differences in perspective between full-cost and contribution margin approaches to marketing cost analysis

Profit and loss statement by department using a full-cost approach

Profit and loss statement if department 1 were eliminated

Contribution margin by departments

12-10 ABC Accounting  Activity-based costing (ABC)  Allocates costs to activities  Identifies fixed cost components for production and sales and associates them with the products sold  Costs once assumed to be fixed in the short-run can be associated with operating units such as a sales office

12-11 Source: Adapted from James M. Reeve, “Activity-Based Cost Systems for Functional Integration and Customer Value,” in Competing Globally through Customer Value: The Management of Strategic Suprasystems, eds. Michael J. Stahl and Gregory M. Bounds (New York: Quorum Books, 1991), p A diagram of activity-based costing

12-12 Source: Robert A. Dwyer and John F. Tanner, Jr., Business Marketing: Connecting Strategy Relationships and Learning (New York: McGraw-Hill, 1999) Comparison of contribution and ABC methods

Steps in conducting a marketing profitability analysis

Major functional accounts that are useful in marketing cost analysis

The T&E Expense Account  Travel and entertainment account  Fraud related to T&E has increased >200% since 1996  Two common frauds  Mischaracterized expenses  Overstated expenses Source: Jay Boehmer, “Expense Fraud Explodes,” Business Traveler News, August 11, 2003, pp. 1, 68–69.

Example profit and loss statement

Allocation of natural accounts to functional accounts

Basic data used for allocations

12.13 Profitability analysis by salesperson 12-19

Activities of Tucker broken down by account

12.15 Profitability analysis for Tucker broken down by customer 12-21

12-22 Marketing Cost Analyses +/-  Benefit - isolates most/least profitable segments of business  Combined with effective sales analysis, provides a formidable tool for managing personal selling  Improves planning and control  Required data may be costly to acquire, maintain  Cost allocation decisions can be difficult

12-23 Return on Assets Managed  Sales analysis - measures the results achieved by the sales force.  Cost analysis - measures the cost of producing those results.  ROAM = Contribution as a percentage of sales x Asset turnover rate  Contribution as percentage of sales = ratio of net contribution divided be sales  Asset turnover rate = sales divided by the assets needed to produce those sales

12.16 Analysis of return on assets managed 12-24

Expanded return on assets managed (ROAM) model

Impact of a reduction in accounts receivable to $250,000 in branch A