1. 12 Cost Analysis McGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 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

3. 12-3 12.1 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

4. 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)

5. 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

6. 12-6 12.1 Differences in perspective between full-cost and contribution margin approaches to marketing cost analysis

7. 12-7 12.2 Profit and loss statement by department using a full-cost approach

8. 12-8 12.3 Profit and loss statement if department 1 were eliminated

9. 12-9 12.4 Contribution margin by departments

10. 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

11. 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. 501. 12.5 A diagram of activity-based costing

12. 12-12 Source: Robert A. Dwyer and John F. Tanner, Jr., Business Marketing: Connecting Strategy Relationships and Learning (New York: McGraw-Hill, 1999). 12.6 Comparison of contribution and ABC methods

13. 12-13 12.7 Steps in conducting a marketing profitability analysis

14. 12-14 12.8 Major functional accounts that are useful in marketing cost analysis

15. 12-15 12.2 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.

16. 12-16 12.10 Example profit and loss statement

17. 12-17 12.11 Allocation of natural accounts to functional accounts

18. 12-18 12.12 Basic data used for allocations

19. 12.13 Profitability analysis by salesperson 12-19

20. 12-20 12.14 Activities of Tucker broken down by account

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

22. 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

23. 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

24. 12.16 Analysis of return on assets managed 12-24

25. Expanded return on assets managed (ROAM) model 12.17 12-25

26. Impact of a reduction in accounts receivable to $250,000 in branch A 12.18 12-26