BASIC QUANTITATIVE ANALYSIS FOR MARKETING
BASIC QUANTITATIVE ANALYSIS FOR MARKETING
BASIC TERMINOLOGY
Simple calculations often help in making quality marketing decisions.
If we are to assess the likely profit consequences of alternative actions, we must understand the cost associated with doing business as well.
We can calculate the expected revenue generated by each pricing strategy, but without cost information, it is not possible to determine the preferred price. The cost concepts we introduce are:
- Variable cost
- Fixed cost
- Total cost
We combine the cost information with price information to determine unit contribution and total contribution.
This Figure is a good enough approximation of actual cost behaviour
Total cost The total cost line (the solid line) does not go through the origin, i.e., for a zero output level, total cost is not zero.
Fixed cost We call OA the firm’s “fixed costs.” Fixed costs are those costs which do not vary with the level of output. An example of a fixed cost is the lease cost of a plant.
Variable cost The variable cost increases as output increases.
TOTAL COST = FIXED COST + TOTAL VARIABLE COST
Contribution Unit contribution = PriceUnit (P) – Variable costUnit (VB)
Total contribution = (P – VB) * Total number of units the firm sells
Total contribution = Total revenue – Total variable cost Price*Total number Variable cost unit*Total number of unit sells of unit sells
The total contribution is the amount available to the firm to cover (or continued to) fixed cost and profit after the variable cost has been deducted from total revenue.
Example: Let’s solidify our understanding of these definitions by working through the video cassette tape pricing problem. Suppose the unit variable cost k is $4; then assuming the sales forecasts for each price level given above are correct:
Price = $5 Unit contribution = $P – VB = $5 - $4 =$1 Total contribution per week =(P-VB) * Tot. number of
BASIC TERMINOLOGY
Simple calculations often help in making quality marketing decisions.
If we are to assess the likely profit consequences of alternative actions, we must understand the cost associated with doing business as well.
We can calculate the expected revenue generated by each pricing strategy, but without cost information, it is not possible to determine the preferred price. The cost concepts we introduce are:
- Variable cost
- Fixed cost
- Total cost
We combine the cost information with price information to determine unit contribution and total contribution.
This Figure is a good enough approximation of actual cost behaviour
Total cost The total cost line (the solid line) does not go through the origin, i.e., for a zero output level, total cost is not zero.
Fixed cost We call OA the firm’s “fixed costs.” Fixed costs are those costs which do not vary with the level of output. An example of a fixed cost is the lease cost of a plant.
Variable cost The variable cost increases as output increases.
TOTAL COST = FIXED COST + TOTAL VARIABLE COST
Contribution Unit contribution = PriceUnit (P) – Variable costUnit (VB)
Total contribution = (P – VB) * Total number of units the firm sells
Total contribution = Total revenue – Total variable cost Price*Total number Variable cost unit*Total number of unit sells of unit sells
The total contribution is the amount available to the firm to cover (or continued to) fixed cost and profit after the variable cost has been deducted from total revenue.
Example: Let’s solidify our understanding of these definitions by working through the video cassette tape pricing problem. Suppose the unit variable cost k is $4; then assuming the sales forecasts for each price level given above are correct:
Price = $5 Unit contribution = $P – VB = $5 - $4 =$1 Total contribution per week =(P-VB) * Tot. number of