International Product
Management
g
Dr. S
D
Sandra
d C
Cohen
h
scohen@aueb.gr
1
Workshop on Financial
Aspects of International
Marketing
2
Session 2
3
Section Outline: Break even point
•
•
•
•
Break even for one product
Contribution margin
Basic cost
cost-volume-profit
volume profit model
Break even point with multiple products
4
Break even analysis
• Break-even point is the level of sales at
which the sales revenue equals total
costs
• At the break-even point the company
has zero operating income (neither a
profit or a loss)
5
Contribution Margin per unit
Price – Variable Cost (production and selling cost)
= Contribution Margin
6
Cost behavior
• In order to calculate the break –even
point the costs have to be analyzed in
y theyy behave when
relation to the way
changes in volume of activity take place
– Variable costs
– Fixed costs
7
Basic CVP in Graphical Format
The Revenue and Cost lines can be overlaid to get a picture
of the CVP relationship.
Cosst & Reveenues
CVP Graph: Fairfield Blues
$1,250,000
$1 000 000
$1,000,000
$750,000
$500,000
$250,000
$0
0
50 000
50,000
90 000
90,000
130 000 170,000
130,000
170 000
Quantity of Tickets Sold
Fairfield Blues
sells tickets for
$7. Fixed
C
Costs
are
$450,000 and
Variable Costs
per unit are $2
per ticket.
p
8
Basic CVP in Graphical Format
Revenue = $7 × Units Sold
Fixed Costs = $450,000
,
Cost & Revenu
ues
CVP Graph: Fairfield Blues
$1 250 000
$1,250,000
$1,000,000
$750,000
$500,000
$250,000
$0
0
50,000
90,000
130,000 170,000
Quantity of Tickets Sold
Total Cost = ($2 × Units Sold) + $450,000
9
Basic CVP in Graphical Format
Loss Area is the amount by which
total cost exceeds revenue.
Cost & Revenu
ues
CVP Graph: Fairfield Blues
Break-Even is
Breakwhere the two
lines intersect.
$1 250 000
$1,250,000
$1,000,000
$750,000
$500,000
$250,000
$0
0
50,000
90,000
130,000 170,000
Quantity of Tickets Sold
Profit Area is
the amount byy
which revenue
exceeds total
cost.
10
B k Even
Break
E
Point
P i t calculation
l l ti
BEP (units) =
Fixed Cost
Contribution margin per unit
Contribution Margin per unit = Price – Variable Cost
BEP (€) =
Fixed cost
Percentage Contribution Margin
Percentage Contribution Margin = Contribution Margin / Price
11
B k Even
Break
E
point
i t
Price = €5,25/unit
Variable Cost = €3,5/unit
Fixed cost = €8.300
Contribution Margin per unit = Price – Variable Cost
BEP (units) =
Fixed Cost
Contribution margin per unit
12
B k Even
Break
E
point
i t
Price = €5,25/unit
Variable Cost = €3,5/unit
Fixed cost = €8.300
Percentage Contribution Margin = Contribution Margin / Price
BEP (€) =
Fixed cost
Percentage Contribution Margin
OR
13
Price = €5,25/unit
Variable cost = €3,50/unit
,
Fixed cost = €8.300
BEP (units) = 4.743 units
BEP (€) = €24.900
€24 900
Difference in
Diff
i units
it
compared to BEP
What would be the
operating
ti income
i
if
5.000 units were
sold?
Contribution
Margin
14
Price = €5,25/unit
Variable cost = €3,50/unit
,
Fixed cost = €8.300
BEP (units) = 4.743 units
BEP (€) = €24.900
€24 900
Difference iin sales
Diff
l
compared to BEP
What would be the
operating
ti income
i
if
sales we € 20.000?
%
Contribution
g
Margin
15
Cost - Volume - Profit analysis
• Sales volume required (units) =
(Fixed costs +required profit)
Contribution margin per unit
• Sales volume required (€) =
(Fixed costs +required profit)
% Contribution p
per unit
16
Cost - Volume - Profit analysis
Price = €10/unit
Variable cost = €6/unit
Fixed Cost = €4.000
Required profit = € 2.000 (ignore taxes)
• Sales volume required (units) =
(Fixed costs +required profit)
Contribution margin per unit
17
Cost - Volume - Profit analysis
Price = €10/unit
Variable cost = €6/unit
Fixed Cost = €4.000
Required profit = € 2.000 (ignore taxes)
• Sales volume required (€) =
(Fixed costs +required profit)
% Contribution margin
18
CVP and
dT
Targett IIncome
Break
Breake -Even
ve analysis
ys s uses $0 for
o p
profit.
o . Target
ge Profit
o
analysis, puts a $ target in the profit variable, but uses the
same model as BreakBreak-Even analysis.
Planet, Inc. sells Model XT telescopes for $2,000 each.
Fixed costs are $200,000, variable costs are $800 per
unit.
How many units does Planet need to sell in order to
have target profit of $120,000?
19
Solution
20
Example
• The following data relates to a new
product due to be launched on the 1st
March 20X2.
– Selling Price €25.00/unit
– Forecast Volume 30,000
30 000 units
– Variable Costs
€15.00/unit
– Fixed Costs €200,000
21
Required:
• Assuming that each of the following are
independent of one another
another, calculate the:
– Break even point in units and €.
– Break even point in units if variable costs per unit
increase to €16.00.
– Break even p
point in € if the fixed costs increase to
€ 235,000.
– Expected profitability based on forecasted volume
– Minimum selling price to meet a profit target of €
70,000.
22
23
24
B k even point
Break
i t with
ith multiple
lti l
products
BEP (units) =
Fi d costt
Fixed
Weighted average Contribution Margin
Weighted average Contribution Margin =
% Sales Α (in units) x CMΑ + % Sales Β (in units) x CMΒ
BEP Α (Units) = BEP x % Sales Α (in units)
BEP B (Units) = BEP x % Sales B (in units)
25
Multiple Products Example
Planet sells three types of telescopes.
Relative sales (units) and cost estimates are the following.
Total sales are 30
30.000
000 units :
Per Unit
Telescope
Model
XT
Earth II
Junior
Sales
price
2.000
1.200
500
Variable
Cost
800
500
150
Relative %
of Sales
CM
units
1.200
25%
700
40%
350
35%
Required:
Calculate the weighted average contribution margin
26
Multiple Products Example
WACM
XT
EARTH II
JUNIOR
TOTAL
PRICE
2000
1200
500
CM
% SALES
1200
25%
700
40%
350
35%
100%
WACM
27
Multiple Products Example
Assume that yearly fixed costs are € 140,500
Per Unit
Telescope
Model
XT
Earth II
Junior
Sales
price
2.000
1.200
500
Variable
Cost
800
500
150
Relative %
of Sales
CM
units
1.200
25%
700
40%
350
35%
Required:
C l l t BEP iin units
Calculate
it ((per product)
d t)
28
Multiple Products Example
BEP in
i units
it ((per product)
d t)
29
Break even point with multiple
products
BEP (€) =
Fi d costt
Fixed
% Weighted Average Contribution Margin
% Weighted Average Contribution Margin
=
% Sales Α (in €) x % CMΑ + % Sales Β (in €) x % CMΒ
OR
BEP in (€) = ΒΕP (in units) A x Price A + ΒΕP (in units) B x Price B
30
Multiple Products Example
• Required:
– Calculate the BEP in (€)
• Use both alternatives
– Calculate the Operating income of the
company
31
Multiple Products Example
% Weighted Average Contribution
Margin
g
XT
EARTHIIII
EARTH
JUNIOR
TOTAL
PRICE CM
%CM
2000
1200
1200
700
500
350
%SALES SALES UNITS SALES €
25%
40%
35%
100%
30.000
%SALES €
%WACM
100%
32
Multiple
p Products Example
p
BEP (€)
33
Multiple
p Products Example
p
Operating Income
34
Example: Department Store
• The marketing manager of a department
store prepares 3 alternative scenarios in
order to make projections about the level of
sales necessary to Break Even
• Scenarios relate to the forecast of sections’
contribution to the total sales (in €)
• Budgeted fixed costs are € 50.000
• Please complete the scenarios and
comment on the results
35
Scenario 1
Women section
Men section Kinds section
S l
Sales
50%
30%
20%
% CM
35%
28%
60%
% Weighted Average CM
Fixed cost
50.000
BEP €
36
Scenario 2
Women section
Men section Kinds section
Sales
40%
30%
30%
% CM
35%
28%
60%
g
Average
g CM
% Weighted
Fixed cost
50.000
BEP €
37
Scenario 3
Women section
Men section Kinds section
Sales
50%
40%
10%
% CM
35%
28%
60%
% Weighted Average CM
Fixed cost
50.000
BEP €
38
International Product
Management
g
Dr. S
D
Sandra
d C
Cohen
h
scohen@aueb.gr
39
Workshop on Financial
Aspects of International
Marketing
40
Session 3
41
Section Outline: Budget
development for a new product
• New product budget development
– Sales budget
– Cost budget
g
• Production cost
– Raw materials, Direct labor and Manufacturing
(Production) Overhead
• Selling and administrative costs
– Budgeted Profit and Loss statement
42
Basic considerations
• Budget timeframe
– What period of time should the budget
cover?
• Product characteristics
• Frequency of controlling forecasts’ accuracy
• Budget
B d t development
d
l
t responsibility
ibilit
– Input from different departments
– Responsibility for data aggregation and
budget presentation
43
Insider’s view
Budget procedure overview
Sales Budget
Production
B d
Budget
Budgeted Schedule
of Direct- Materials
Consumption
Direct- Labor Budget
Manufacturing
Overhead Budget
Budgeted Schedule of Cost of
Goods
Manufactured and Sold
Selling and Marketing Budget
Administrative Budget
Budgeted Income Statement
Cash Budget
44
Budget is developed in steps
• Budget development is a stepwise procedure
– Data gathering precedes data processing
– Some budgets are developed in sequence (budget
amounts
t are correlated)
l t d) and
d some others
th
iin
parallel (budget amounts are independent)
• Use
U off a software
ft
program
– Commercial or customized
– Excel intergraded spreadsheets
45
Budget is developed in steps
• Analytical presentation and justification
of all hypotheses included in the budget
– Accuracy safeguarding
– Revisions facilitation
– Objective benchmark for comparing actual
figures with budgeted estimations
46
Sales budget
• Sales budget is the cornerstone of the
total budget construction
• Sales volume forecasts are based on:
– Subjective/Qualitative methods
– Objective/Quantitative
Obj ti /Q
tit ti methods
th d
• Both internal and external factors are
taken into consideration
47
Internal factors
• Expected sales per
–
–
–
–
•
•
•
•
•
product size, packaging, etc.
salesman
geographic area
distribution channel
Marketing strategies and promotion campaigns
Product seasonality
Market research indications
Production capacity
…..
48
External factors
• Projections related to the national economy
and international economies trends
• Projections regarding the sales and profit
margins of the industry
• Competition conditions
–
–
–
–
Other products – substitutes Competitors
Buyers bargaining power
S ll
Sellers
bargaining
b
i i power
• …..
49
Sales budget
• Be careful when making sales projections
– What is the correct price
p
• Prices may be B2C and B2B
• The
e retail
ea p
price
ce is
s the
ep
price
ce the
e cus
customer
o e is
s pay
paying
g
for the product – it includes VAT
• The whole sale p
price is the p
price that the retailer
pays to the wholesaler – VAT is added on top
50
How could VAT be taken out
from the retail price ?
Price used for revenues calculation =
Retail price
(1+ % VAT)
You buy a sandwich for € 2,80, VAT 23%.
Sales revenue for the bakery = € 2,80
2 80 /(1+0
/(1+0,23)
23) = € 2,28
2 28
51
Example
• Company A sells product X to company B for € 10 / unit
• Company B sells product X to customers for € 25 /unit
– VAT 23%
• Required:
– Calculate the sales revenues of company A for 10 units
– Calculate the sales revenues of company B for 10 units
– Calculate the % gross margin of company B
52
Solution
Price Company A Quantity Sales revenue
10
Price Company B 10
100
Quantity Sales revenue
25
10
250
Price Company B 20,3252
Quantity Sales revenue
10
203,252
Gross margin Sales 203,3
Cost of good sold
Cost of good sold 100 0
100,0
Gross margin 103,3
50,80%
53
Sales budget
• Pricing policy is extremely important
– Elasticity of demand
• Sales price
price, discounts
discounts, bundles
bundles, special
offers, etc.
Sales
l Budget
d (in
(i €)) =
Sales Budget
g (in
( units)) ×
Sales price per unit
54
Sales budget international
considerations
• Companies that operate in an international
context
t t should
h ld d
develop
l a sales
l b
budget
d t ffor
any given national market and then integrate
th
them
iinto
t a single
i l sales
l b
budget
d t
• The heterogeneous characteristics of the
national markets influence among others the
estimated quantities of products to be sold,
the seasonality of the demand, the pricing
policy, etc.
55
Production budget
• Production budget is based on the sales
budget after making the necessary
j
adjustments
– the beginning inventory of finished goods
– the expected sales
– the ending desired inventory of finished
goods
d
56
Production budget
• Inventory policy is affected by:
– Product vulnerability
– Speed of technological obsolescence
– Warehousing costs
– Etc.
Et
57
Production budget
Production budget (units) =
Sales budget (units)
+ Desired ending inventory (units)
- Beginning inventory (units)
58
Production budget
international considerations
• Operation in different markets does not
i fl
influence
th
the aforementioned
f
ti
d methodology
th d l
• Production budget should incorporate:
– the different market dynamics and the different
market maturity stages that eventually effect the
l
levels
l off d
desired
i d iinventories
t i
• In case production takes place in more than
one factories, the production budget is
accordingly adjusted
59
Production cost budgets
• Based on the production budget the
following budgets are developed
– the budget of direct materials,
– the budget of direct labor and
– the manufacturing overhead budget
60
Budgeted Schedule of Direct
Material Consumption
• Direct materials are all the raw materials
th t are incorporated
that
i
t d iinto
t th
the product
d t
• They
y constitute an important
p
p
part of the
total cost of the materials that will be
p
consumed for its production
• Direct materials are part of the direct
cost because they are directly
associated with the product
61
Budgeted Schedule of Direct
Material Consumption
• Includes the quantity and the cost of the
necessary direct materials
• It is based on product’s technical
specifications
– quantities of direct materials required for the
completion of the product, based on the
measurement unit of each direct material (e.g.
kilograms, meters, etc)
– Technical specifications should also mention the
incurrence of waste during the production process
62
Budgeted
g
Schedule of Direct
Material Consumption
Budget of Direct-Material Consumption =
Required direct materials (units)
× Direct materials cost per unit
63
Budgeted
B
d t d Direct
Di t Material
M t i lC
Consumption
ti
international considerations
• In case production takes place in more
th one ffactories,
than
t i
the
th budgeted
b d t d
schedule of direct material consumption
should
h ld ttake
k iinto
t consideration
id ti
– Differences in direct material prices in
different areas
– Transportation costs
– Production efficiency that effects waste
– etc.
64
Direct labor budget
• Direct labor is the labor offered by those
who
h are directly
di tl involved
i
l d iin th
the
processing of direct materials
• Direct labor constitutes an important
part of the total labor cost
p
• Direct labor is part of the direct cost
because it is directly associated with the
product
65
Direct labor budget
• Direct labor is usually required along the range of all
processing activities
– From the original shaping to the completion of the product
– It can be either manual or technical (through the operation of
machines)
• When the production process takes place in more
than one departments direct labor budgets
g
are
developed on a departmental basis
• The hourly labor cost per department usually varies
according to the company remuneration policy
66
Direct labor budget
international considerations
• In case production takes place in more than
one factories,
f t i
the
th direct
di t labor
l b b
budget
d t should
h ld
take into consideration
–
–
–
–
Salary differences
Workers’ working hours
Overtime policy and remuneration
Production facilities conditions (level of
automatization)
i i )
– etc.
67
Manufacturing Overhead
budget
• Manufacturing (production) overhead is the
i di t costt th
indirect
thatt is
i iincurred
d iin th
the context
t t off a
production process of a company and must
b allocated
be
ll
t d tto allll products
d t produced
d
d
– indirect or other materials
– indirect labor
– various operating expenses (rents, energy,
i
insurance,
d
depreciation,
i ti
utilities)
tiliti )
– etc.
68
Manufacturing Overhead
budget
• Manufacturing Overhead Budget=
• Manufacturing
Overhead
associated with the new
(usually negligible)
directly
product
• + [Allocation
[All
ti rate
t × allocation
ll
ti base
b
(
(e.g.
product unit, direct labor hours)]
69
Allocation rate
• In the beginning of each year in each
factory an allocation rate is calculated
Budgeted production overheads
Budgeted level of allocation base
(
(e.g.
product
d
units, direct
d
labor
l b hours)
h
)
70
Manufacturing Overhead budget
international considerations
• In case production takes place in more
than one factories, the manufacturing
g should take into
overhead budget
consideration
– Differences in production overheads
– Differences in allocation rates
– etc.
71
Total production cost
international considerations
• In case production takes place in more
than one factories, the total production
g
cost should take into
budgeted
consideration
– Differences in per unit production cost in
different factories
– An
A average production
d ti costt should
h ld also
l b
be
calculated
72
Cost of goods manufactured
• The cost of goods manufactured during
a period refers to the cost of the
products that were p
p
produced during
g
this period
• It is calculated as the sum of direct
materials consumed, direct labor and
manufacturing overhead (allocated)
73
Cost of goods produced
Direct materials
+
Di t llabor
Direct
b
+
Cost
of
goods
produced
Production Overhead
74
Cost of goods sold
• The cost of goods sold during a period
of time refers to the cost of the products
g this p
period
that were sold during
• It is the sum of the value of beginning
inventory of finished goods plus the
cost of goods manufactured minus the
value of the ending inventory of finished
goods
g
75
Cost of goods sold
Cost
of
goods
produced
Cost of
beginning
+
inventory
(produced in a
previous
i
period)
i d)
Cost of
ending
inventory
=
Cost
of
goods
d
sold
76
Administrative expenses
budget
• The general administrative expenses are the
expenses that related to the company’s
company s
administration
• Expenses of supporting departments
–
–
–
–
the accounting department
the human resource management department
the legal services
the information technology (IT) department
• Other expenses
p
– General manager’s salaries, the rent, the electricity and the
conditioning of the central offices etc.
77
Administrative expenses
budget
• Usually there are no direct administrative
expenses related
l t d tto a new product
d t
– However if the new product initiates a new product
li th
line
there may b
be di
directt admin.
d i expenses
• The budgeted administration expenses that
are associated with the new product are
calculated by multiplying the budgeted sales
value
l off the
h new product
d
with
iha
predetermined (usually percentage) rate
78
Selling expenses budget
•
•
•
The Selling Expenses are the expenses created in order to
promote sales and deliver the products to the end consumer
They also include marketing expenses
Examples:
–
–
–
–
–
–
–
advertising costs,
salaries of the sales manager,
salaries and commissions of the sales-persons,
sales persons,
expenses for commercial exhibitions participation,
finished products transportation and logistics expenses,
promotion
ti expenses ,
etc.
79
Selling expenses budget
• Direct expenses
• Refers to the special
promotion activities
for the new product
–
–
–
–
free samples
advertisements
listing fees,
etc
etc.
• Indirect expenses
•
These expenses are
associated not only with the
new product but with other
products as well
– Examples: the proportion of
sales-persons salaries and
those of their managers,
their traveling
g expenses,
p
, the
costs of participating in
exhibitions, etc.
These expenses are allocated to
the new product on the basis of
a predetermined rate
80
Selling expenses budget
international considerations
• In case the new product is launched in
several markets the different promotion
q
in these markets should
requirements
be taken into consideration
81
Budgeted income statement
Budgeted Sales
- Budgeted cost of goods sold
=Budgeted gross margin
- Administrative and selling expenses
=Budget operating income
……………
……………
……………
……………
……………
82
Cash budget
• All the inflows and the outflows that are related to the
new product are presented in the Cash budget
– Presentation and assessment of the liquidity constrains
imposed by the new product
– It provides valuable information to management for finance
decisions
• The sales are translated in cash collections on the
b i off th
basis
the credit
dit policy
li ffollowed
ll
db
by th
the company
• The expenses that are related to the product are
transformed into payments
83
Finalizing the budget
• Application of sensitivity analysis and
scenario
i planning
l
i
– Sensitivity analysis:
• One or more parameters that participate in the
budget development are changed and in this
way the crucial points are determined
• The parameters that are proved to have a
considerable impact
p
on the p
profitability
y and the
viability of the new product are identified and
carefully studied
84
Finalizing the budget
• Application of sensitivity analysis and
scenario
i planning
l
i
– Scenario planning:
• Different combinations of the possible outcomes of
several parameters are modeled
• Usually, the pessimistic, the normal and the optimistic
scenario are developed
– These scenarios are given probabilities of incurrence
• Th
Their
i outcomes
t
are assessed
d in
i terms
t
off their
th i financial
fi
i l
and no financial implications to the company
85
What if you have to apply an
external view?
• Detailed information is not available
– Companies do not reveal their costs !
– Base assumptions on data retrieved by financial
statements and market benchmarks
• Analyse % gross margins (gross margin/sales)
• % of Selling and Administrative expenses over sales
– Try to make informed projections based on
marketing policies
86
Example
Sales
Cost of goods sold
Gross Margin
Selling and administrative expenses
Financial expenses Net income 20X3
% 50.000 100,00%
32.000 64,00%
18.000 36,00%
7.500 15,00%
2.500
5,00%
8.000 16,00%
Amounts in '000 euros
87
What if we just buy and resell
the product?
• In this case there is no production cost
budget
– Make assumptions about the quantity of
products to be bought and sold
• Similarities with the raw materials acquisition
budget
• Define selling
gp
prices
88