1. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-1 17 Managing Productivity and Marketing Effectiveness

2. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-2 17 Managing Marketing Effectiveness A firm is effective in marketing when it: A firm is effective in marketing when it: Earns the budgeted operating income, Earns the budgeted operating income, Attains budgeted market share, and Attains budgeted market share, and Adapts to changes in the market. Adapts to changes in the market. A firm is effective in marketing when it: A firm is effective in marketing when it: Earns the budgeted operating income, Earns the budgeted operating income, Attains budgeted market share, and Attains budgeted market share, and Adapts to changes in the market. Adapts to changes in the market.

3. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-3 17 Sales Variance Selling Price VarianceSales Volume Variance Sales Quantity VarianceSales Mix Variance Market Size VarianceMarket Share Variance Sales Variances and Their Components

4. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-4 17 Selling Price and Sales Volume Variances Variances that are often used to evaluate marketing performance Selling Price Variance (SPV) The variance resulting from changes in the price of goods sold Sales Volume Variance (SVV) The variance resulting from changes in the volume of sales

5. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-5 17 Variances that are often used to evaluate marketing performance Selling Price Variance (SPV) SPV = (AP – SP) × AQ AP=Actual Sales Price SP=Budgeted (Standard) Sales Price AQ= Actual Sales Volume Sales Volume Variance (SVV) SVV = (AQ – SQ) × BC AQ= Actual Sales Volume SQ= Master Budget Sales (Standard) Volume BC= Budgeted Contribution Margin Selling Price and Sales Volume Variances

6. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-6 17 Let’s recall the Cheese Co. example from Chapter 15. Selling Price and Sales Volume Variances

7. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-7 17 Selling Price and Sales Volume Variances

8. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-8 17 8,000 units × $11 per unit 8,000 units × $10 per unit 10,000 units × $10 per unit Selling Price and Sales Volume Variances

9. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-9 17 SPV = (AP- SP) × AQ SPV = ($11 per unit – $10 per unit) × 8,000 units SPV = $8,000 F Selling Price and Sales Volume Variances

10. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-10 17 SVV = (AQ – SQ) × BC SVV = (8,000 units – 10,000 units) × $5 per unit SVV = $10,000 U $50,000 ÷ 10,000 units SPV = (AP- SP) × AQ SPV = ($11 per unit – $10 per unit) × 8,000 units SPV = $8,000 F Selling Price and Sales Volume Variances

11. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-11 17 Sales Volume Variance Sales Mix Variance A measure of the impact of a decline in the volume of one product and an increase in the volume of another product Sales Quantity Variance A measure of the impact of a change in total sales quantity, holding the sales mix constant Sales Mix and Sales Quantity Variances

12. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-12 17 Consider a different example from the Magness Company. Sales Mix and Sales Quantity Variances

13. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-13 17 Magness Company First Quarter Estimated and Actual Results Sales Mix and Sales Quantity Variances

14. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-14 17 Sales Mix Variance $280,000 U Sales Quantity Variance $480,000 F Sales Volume Variance = $200,000 F * * ASQ = Quantity of units that would have been sold at the expected mix. Sales Mix and Sales Quantity Variances

15. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-15 17 Sales Mix Variance $140,000 F Sales Quantity Variance $160,000 F Sales Volume Variance = $300,000 F * * ASQ = Quantity of units that would have been sold at the expected mix. Sales Mix and Sales Quantity Variances

16. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-16 17 Sales Mix and Sales Quantity Variances

17. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-17 17 Due to mix change from 60% to 50% of 280,000 actual units sold × $10 unit contribution Sales Mix and Sales Quantity Variances

18. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-18 17 Due to mix change from 40% to 50% of 280,000 actual units sold × $5 unit contribution Sales Mix and Sales Quantity Variances

19. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-19 17 Due to sale of 48,000 units more than expected × $10 unit contribution 80,000 total units × 60% expected mix Sales Mix and Sales Quantity Variances

20. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-20 17 Due to sale of 32,000 units more than expected × $5 unit contribution 80,000 total units × 40% expected mix Sales Mix and Sales Quantity Variances

21. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-21 17 Market share variance assesses the effect on operating income of changes of a firm’s proportions of the total market. Market size variance measures the effect on operating income of changes in the total market size of the firm’s product. Market Size and Market Share Variances

22. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-22 17 Consider the following additional data from the Cheese Co. Market Size and Market Share Variances

23. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-23 17 Estimated market volume = 40,000 units Cheese Co. estimated market share = 25 percent Budgeted Cheese Co. sales =.25 × 40,000 = 10,000 units Actual market volume = 33,333 units Actual Cheese Co. sales = 8,000 units Actual Cheese Co. market share = 8,000 ÷ 33,333 = 24 percent How much of the 2,000 unit sales activity decline is due to general market conditions, and how much is due to a change in the company’s market share? Market Size and Market Share Variances

24. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-24 17 Given the industry volume decline from 40,000 to 33,333 units, Cheese Co. would expect a volume decline of 1,667 units at the expected market share of 25 percent: (40,000 – 33,333) ×.25 = 1,667 units U (rounded) Market Size and Market Share Variances

25. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-25 17 Given the industry volume decline from 40,000 to 33,333 units, Cheese Co. would expect a volume decline of 1,667 units at the expected market share of 25 percent: (40,000 – 33,333) ×.25 = 1,667 units U (rounded) The market share decline from 25 to 24 percent results in an unfavorable market share effect of 333 units: (.25 –.24) × 33,333 = 333 units U (rounded) Market Size and Market Share Variances

26. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-26 17 Given the industry volume decline from 40,000 to 33,333 units, Cheese Co. would expect a volume decline of 1,667 units at the expected market share of 25 percent: (40,000 – 33,333) ×.25 = 1,667 units U (rounded) The market share decline from 25 to 24 percent results in an unfavorable market share effect of 333 units: (.25 –.24) × 33,333 = 333 units U (rounded) Sales quantity variance in units = 1,667 units U + 333 units U = 2,000 units U Market Size and Market Share Variances

27. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-27 17 Multiplying each unit amount by the standard contribution margin converts each unit amount to a variance in dollars: Industry volume variance= ($10 – $5) × 1,667 units= $ 8,335 U Market share variance = ($10 – $5) × 333 units= 1,665 U Sales quantity variance= $10,000 U Market Size and Market Share Variances

28. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-28 17 Market share variance Market size variance SP=Standard Sales Price BMS=Budgeted Market Share SV=Standard Variable Cost AIQ=Actual Industry Volume AQ=Actual QuantitySQ=Standard Quantity Market Size and Market Share Variances

29. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-29 17 Market share variance $1,665 U Market size variance $8,335 U Sales quantity variance = $10,000 U * * Rounded down to agree with previous example Market Size and Market Share Variances

30. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 17-30 17 End of Chapter 17