MARKETING COST ANALYSIS
QS: Marketing Cost Analysis with example/ Marketing cost analysis helps management to
take their decision.
Marketing cost analysis also known as ‘distribution cost analysis’ is the analysis of cost that
affects sales volume. The purpose of marketing cost analysis is to determine the profitability of
sales (or marketing) control units, like marketing segments, sales territories, and products. This
is done by subtracting the marketing costs from the sales revenue, associated with sales control
units.
Marketing cost analysis is a managerial tool that is used for planning and control of a company’s
future operations. Companies need to measure the profitability of their territories, customer
groups, market segments, products, distribution channels and order sizes. This information will
help the management to decide whether any sales and marketing activities or products should
be expanded, reduced or eliminated in future.
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(b) Solution: Cost Per Driver:
Selling cost = $65,000 / 10,000 calls = $65 per call
Packing and shipping cost = $12,000/1000 orders = $12 per order
Credit and Allocation cost = $15,000/10,000 invoice line = $1.5 per invoice line
General accounting cost = $18,000/1000 orders = $18 per order
Advertising : Dept. Store = $1,80,000/$7,20,000 = 0.25
Retail Store = $2,40,000/$7,20,000 = 0.33
Wholesaler = $3,00,000/$7,20,000 = 0.42
Income Statement by Customer Classes
Particulars
Sales
-COGS
Gross Profit
Marketing Expenses:
Selling Cost:
Dept Store: $65 per call X 240 calls
Retail store: $65 per call X 360 calls
Wholesale: $65 per call X 400 calls
Packing & Shipping:
Dept Store: $12 per order X 120 orders
Retail store: $12 per order X 580 orders
Wholesale: $12 per order X 300 orders
Advertising: Dept Store: 0.25 X $20,000
Retail store: 0.33 X $20,000
Wholesale: 0.42 X $20,000
Audit & Collection:
Dept Store: $1.5 per invoice line X 2100 lines
Retail store: $1.5 per invoice line X 4600 lines
Wholesale: $1.5 per invoice line X 3300 lines
General Accounting:
Dept Store: $18 per order X 120 order
Retail store: $18 per order X 580 order
Wholesale: $18 per order X 300 order
Total Marketing Cost
Profit
Profit Rate on Sales
Total
7,20,000
5,43,000
1,77,000
Dept. Store
1,80,000
1,54,000
26,000
Retail Store
2,40,000
1,60,000
80,000
Wholesale
3,00,000
2,29,000
71,000
65,000
15,600
23,400
26,000
12,000
1440
6960
3600
20,000
5000
6600
8400
15,000
3150
6900
4950
18,000
2160
10440
5400
$54,300
$25,700
25,700÷
2,40,000
=10.7%
$48,350
$22,650
22,650÷
3,00,000
=7.55%
$1,30,000 $27,350
$47,000
-$1350
-1350÷
1,80,000
=-0.75%
Comment: Among the three customers Retail store is highly profitable and departmental store
is unprofitable for the firm. Company is generating 10.7% return on sales of retail store whereas
it is 7.55% from the wholesaler. Though the highest sales is generated from wholesale customer
however direct cost i.e. COGS of wholesale customer is higher (76% of sales) compared to retail
customer which is 67% of sales. Despite marketing cost being highest for retail customer, it is
found to be the most profitable customer group due to its lower level direct cost (COGS). The
firm is generating least sales from department store and the direct cost to sales ratio is also
highest (86% of sales) for this customer group.
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(c) Solution: Marketing Cost Analysis by Sales Territory
Particulars
Salaries:
Ctg: $86,000 X (2/5)
Rajshahi: $86,000 X (3/5)
Sales Person Expenses:
Ctg: $16,000 X (2/5)
Rajshahi: $16,000 X (3/5)+ [1000 X 3]
Advertising:
Ctg: $30,000 X (1,50,000/9,00,000)
Rajshahi: $30,000 X (7,50,000/9,00,000)
Delivery Expense:
Ctg:$36,000 X (1800/4800)
Rajshahi: $36,000 X (3000/4800)
Audit Investigation Exp:
Ctg: $8,000 X (200/500)
Rajshahi: $8,000 X (300/500)
Collection Expense:
Ctg:$16,000 X (4000/10,000)
Rajshahi: $16,000 X (6000/10,000)
Total Marketing Cost
Total
86,000
Chittagong Rajshahi
34,400
51,600
19,000
6400
12,600
30,000
5000
25,000
36,000
13,500
22,500
8000
3200
4800
16,000
6400
9600
$1,95,000 $68,900
$1,26,100
Comment: Marketing cost of Rajshahi is higher than the Chittagong territory. Since the number
of customers are more in Rajshahi (300 customers) compared to Chittagong (200 customers),
hence, cost related to selling, distribution and marketing also got increased for Rajshahi. Given,
the sales revenue, it can be identified which territory is more profitable.
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(b) SOLUTION: Working for Sales Commission
Ctg
Dhaka
Rajshahi
P1
(10000X0)
+(30000X0.03)
+(16000X0.06)
=1860
(10000X0)
+(7000X0.03)
=210
(10000X0)
+(30000X0.03)
+(10000X0.06)
=1500
P2
(10000X0)
+(18000X0.03)
=540
P3
P4
(10000X0)
(4000X0)
+(15000X0.03) =0
=450
(10000X0)
(10000X0)
0
+(10000X0.03) +(30000X0.03)
=300
+(8000X0.06)
=1380
(10000X0)
0
0
+(30000X0.03)
+(7000X0.06)
=1320
P5
Total
(10000X0)
$3300
+(15000X0.03)
=450
0
$1890
0
$2820
Income Statement by Sales Territory
Particulars
Sales
- Sales & Marketing Expenses
Sales Commission: (working)
Salaries:
Ctg:60,000 X (5/10)
Dhk:60,000 X (3/10)
Ctg:60,000 X (2/10)
Advertising Expenses:
Ctg:20,000 X (138,000/320,000)
Dhk:20,000 X (85,000/320,000)
Raj:20,000 X (97,000/320,000)
Travelling Expenses:
Ctg:3650 X (5/10)
Dhk:3650 X (3/10)
Ctg:3650 X (2/10)
Warehouse Expenses: Fixed
Variable:
Ctg:1710 X (5/10)
Dhk:1710 X (3/10)
Ctg:1710 X (2/10)
Delivery Expenses:
Ctg: 1500 X 0.40
Dhk: 1500 X 0.30
Ctg: 1500 X 0.30
Collection Expenses:
Ctg:1675 X (10000/20000)
Dhk:1675 X (4000/20000)
Ctg:1675 X (6000/20000)
Total Marketing Cost
Profit Per State
Marketing cost % Sales
Total
3,20,000
Chittagong
1,38,000
Dhaka
85,000
Rajshahi
97,000
8010
60,000
3300
30,000
1890
18,000
2820
12,000
20,000
8625
5312.5
6062.5
3650
1825
1095
730
450
1710
250
855
100
513
100
342
1500
600
450
450
1675
837.5
335
502.5
$96,995
$46,292.5
$2,23,005 $91,707.5
33.5%
$27,695.5 $23,007
$57,304.5 $73,993
32.6%
23.7%
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Comment: Though marketing cost as a percentage of sales is highest for Chittagong, but this
territory generates the largest revenue resulting in as the most profitable sales territory.
Rajshashi generates more revenue compared Dhaka and also reports lower marketing cost as a
percentage of sales and hence Rajshahi is recorded as the second most profitable territory.
Dhaka is found to be least profitable among three sales territories.
QS 1.
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Required: (1) Compute for April, gross margin and operating income of each distribution
channel using activity based costing information.
(ii) Calculate gross margin percentage and percentage of operating expense for each
distribution channel. What new insights are available with the activity –based cost information?
SOLUTION: Working: Cost Per Driver
Customer Purchase order processing= $220,000/5500 orders = $40 per order
Line-item ordering = $175,560/58,520 line items = $3 per line item order
Store delivery = $195,250/3905 store deliveries = $50 per delivery
Cartons dispatched = $209,000/209,000 dispatches = $1 per dispatch
Shelf-stocking at customer store = $28,160/1760 hours = $16 per hour
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Income Statement by Distribution Channel
Revenues:Supermkt:330 delivery X $84,975
Drugstore: 825 X $28,875
Chemist:2750 X $5445
Less: COGS:
Supermkt: 330 delivery X $82,500
Drugstore: 825 X $27,500
Chemist:2750 X $4950
Gross Margin
Less: Operating Costs:
Customer purchase order processing:
Supermkt:$40 per order X 385 orders
Drugstore: $40 per order X 990 orders
Chemist: $40 per order X 4125 orders
Line item ordering
Supermkt: $3 per line item order X 14 line
items per order X 385 orders
Drugstore: $3 X 12 X 990 orders
Chemist: $3 X 10 X 4125 orders
Store delivery
Supermkt: $50 per delivery X 330 deliveries
Drugstore: $50 X 825 deliveries
Chemist: $50 X 2750 deliveries
Cartons dispatched to store
Supermkt: $1 per dispatch X 300 Cartons per
delivery X 330 deliveries
Drugstore:$1 X 80 X 825
Chemist: $1 X16 X 2750
Shelf stocking at customer store
Supermkt:$16 per hour X 3 hour X 330
deliveries
Drugstore:$16 p/hX 0.6 hour X 825 delivery
Chemist:$16 p/hX 0.1 hour X2750 delivery
Total Operating Costs
Operating Income
Gross Margin % of Sales Revenue
Operating Expenses % Sales Revenue
Operating Income % Sales Revenue
Supermarket
$280,41,750
Drugstore
$238,21,875
Chemist
149,73,750
Total
668,37,375
$272,25,000
$226,87,500
$136,12,500
$635,25,000
$816,750
$11,34,375
$13,61,250
$33,12,375
15,400
39,600
165,000
16,170
35,640
123,750
16,500
41,250
137,500
99,000
66,000
44,000
15,840
7,920
4,400
162,910
653,840
2.91%
0.58%
2.33%
190,410
943,965
4.76%
0.8%
3.96%
474,650
886,600
9.09%
3.17%
5.96%
$827,970
$24,84,405
4.96%
1.24%
3.72%
Comments and Insights : The activity based cost information highlights, how the Chemist shop
uses a larger amount of RST ltd’s operating resources per revenue (3.17%) than do the other
two distribution channels which is reported through operating expenses as a percentage of
revenue.
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