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Please find my attachment’s

Revised Confirming Pages

A Preface
to Marketing
Management

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Revised Confirming Pages

A Preface
to Marketing
Management

Twelfth Edition

J. Paul Peter
University of Wisconsin–Madison

James H. Donnelly, Jr.
Gatton College of Business and
Economics University of Kentucky

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A PREFACE TO MARKETING MANAGEMENT, TWELFTH EDITION

Published by McGraw-Hill, a business unit of The McGraw-Hill Companies, Inc., 1221
Avenue of the Americas, New York, NY 10020. Copyright © 2011 by The McGraw-Hill Companies, Inc.
All rights reserved. Previous editions © 2008, 2006, and 2003. No part of this publication may be reproduced
or distributed in any form or by any means, or stored in a database or retrieval system, without
the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited
to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available
to customers outside the United States.

This book is printed on acid-free paper.

1 2 3 4 5 6 7 8 9 0 WDQ/WDQ 1 0 9 8 7 6 5 4 3 2 1 0

ISBN 978-0-07-352996-7
MHID 0-07-352996-6

Vice President & Editor-in-Chief: Brent Gordon
VP EDP/Central Publishing Services: Kimberly Meriwether David
Publisher: Paul Ducham
Executive Editor: Douglas Hughes III
Associate Marketing Manager: Jaime Halteman
Editorial Coordinator: Gabriela Gonzalez
Project Manager: Robin A. Reed
Design Coordinator: Brenda A. Rolwes
Cover Designer: Studio Montage, St. Louis, Missouri
Cover Image Credit: Royalty-Free/CORBIS
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Media Project Manager: Suresh Babu
Composition: Laserwords Private Limited
Typeface: 10/12 Times New Roman
Printer: World Color Press, Inc.

All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.

Library of Congress Cataloging-in-Publication Data

Peter, J. Paul.
A preface to marketing management / J. Paul Peter, James H. Donnelly, Jr.–Twelfth ed.
p. cm.

Includes bibliographical references and index.
ISBN 978-0-07-352996-7 (alk. paper)
1. Marketing–Management. I. Donnelly, James H. II. Title.
HF5415.13.P388 2010
658.8–dc22

2009043316

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a Web site
does not indicate an endorsement by the authors or McGraw-Hill, and McGraw-Hill does not guarantee the
accuracy of the information presented at these sites.

www.mhhe.com

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To Rose and Angie
J. Paul Peter

To Gayla
Jim Donnelly

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About the Authors
J. Paul Peter
has been a faculty member at the University of Wisconsin since 1981. He was a member
of the faculty at Indiana State, Ohio State, and Washington University before joining the
Wisconsin faculty. While at Ohio State, he was named Outstanding Marketing Professor
by the students and has won the John R. Larson Teaching Award at Wisconsin. He has
taught a variety of courses including Marketing Management, Marketing Strategy, Con-
sumer Behavior, Marketing Research, and Marketing Theory, among others.

Professor Peter’s research has appeared in the Journal of Marketing, the Journal of
Marketing Research, the Journal of Consumer Research, the Journal of Retailing, and the
Academy of Management Journal, among others. His article on construct validity won the
prestigious William O’Dell Award from the Journal of Marketing Research, and he was a
finalist for this award on two other occasions. Recently, he was the recipient of the Churchill
Award for Lifetime Achievement in Marketing Research, given by the American Marketing
Association and the Gaumnitz Distinguished Faculty Award from the School of Business,
University of Wisconsin–Madison. He is an author or editor of over 30 books, including A
Preface to Marketing Management twelfth edition; Marketing Management: Knowledge and
Skills, nineth edition; Consumer Behavior and Marketing Strategy, nineth edition; Strategic
Management: Concepts and Applications, third edition; and Marketing: Creating Value for
Customers, second edition. He is one of the most cited authors in the marketing literature.

Professor Peter has served on the review boards of the Journal of Marketing, Journal of
Marketing Research, Journal of Consumer Research, and Journal of Business Research and
was measurement editor for JMR and professional publications editor for the American
Marketing Association. He has taught in a variety of executive programs and consulted for
several corporations as well as the Federal Trade Commission.

James H. Donnelly, Jr.
has spent his academic career in the Gatton College of Business and Economics at the
University of Kentucky. In 1990 he received the first Chancellor’s Award for Outstanding
Teaching given at the University. Previously, he had twice received the UK Alumni Associa-
tion’s Great Teacher Award, an award one can only be eligible to receive every 10 years. He has
also received two Outstanding Teacher awards from Beta Gamma Sigma, national business
honorary. In 1992 he received an Acorn Award recognizing “those who shape the future” from
the Kentucky Advocates for Higher Education. In 2001 and 2002 he was selected as “Best
University of Kentucky Professor.” In 1995 he became one of six charter members elected to
the American Bankers Association’s Bank Marketing Hall of Fame. He has also received a
“Distinguished Doctoral Graduate Award” from the University of Maryland.

During his career he has published in the Journal of Marketing Research, Journal of
Marketing, Journal of Retailing, Administrative Science Quarterly, Academy of Manage-
ment Journal, Journal of Applied Psychology, Personnel Psychology, Journal of Business
Research, and Operations Research among others. He has served on the editorial review
board of the Journal of Marketing. He is the author of more than a dozen books, which
include widely adopted academic texts as well as professional books.

Professor Donnelly is very active in the banking industry where he has served on the board
of directors of the Institute of Certified Bankers and the ABA’s Marketing Network. He has
also served as academic dean of the ABA’s School of Bank Marketing and Management.

vi

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vii

Preface
NOTE FROM THE AUTHORS

The original purpose of A Preface To Marketing Management—to deliver a clear and con-
cise presentation of the basic principles of marketing—is as relevant today as it was in ear-
lier editions. To us this means emphasizing quality content and avoiding excess verbiage,
pictures, and lists. We think we have succeeded in doing so since a reviewer called our book
“pound for pound the best introductory marketing text available.”

We introduce the 12th edition with a sense of accomplishment knowing that our book
and its eight foreign translations have been used throughout the world whenever courses
require an overview of the critical aspects of marketing management. Consequently, the
book has been used successfully in a wide variety of different course settings and is the
best selling book of its kind. We believe it has endured because we continuously fine tune
and update it to ensure that it meets the current and evolving needs of both students and
instructors. Because marketing is about figuring out how to do a superior job of satisfying
customers, we simply seek to practice what we preach. We refer to out book as the Preface.
Welcome to this edition which is organized into four sections.

Section I. Essentials of Marketing Management
This section consists of 13 chapters that present the essentials of marketing management.
Our objective is to present the “must know” content of the field useful in analyzing mar-
keting problems and cases and developing marketing plans. It is divided into four sections
that emphasize introducing the field, understanding target markets, understanding market-
ing mix variables, and marketing in special fields. Careful study of this section should give
students a clear understanding of the terminology, techniques, tools, and strategies used in
effective marketing management and marketing strategy development.

Section II. Analyzing Marketing Problems and Cases
This section has been widely praised as the best presentation available on the topic. In fact,
it has found its way to other areas of many campuses where it is used by students in fields
where case problems are used but which are unrelated to the field of marketing. It presents
a comprehensive framework for analyzing, preparing, and presenting case analyses.

This section could have been placed at the beginning of the book because it is designed
to be read at the start of a course using cases. However, because it is referred to throughout
the semester, we placed it after the text chapters. Also, for those courses that do not utilize
cases, the book may be used without reference to this section.

Section III. Financial Analysis for Marketing Decisions
It is important for marketing students to appreciate that the ultimate objectives of market-
ing are usually expressed in financial terms. With this in mind, this section presents impor-
tant financial calculations that will be useful in evaluating the financial position of a firm
and the financial impact of various marketing decisions and strategies.

Section IV. Developing Marketing Plans
In keeping with the concept of our book and the needs of its users, this section helps read-
ers develop practical planning skills. It contains an approach to developing a marketing
plan by providing a general format for structuring and presenting one.

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THE 12TH EDITION OF THE PREFACE

The content of this book is continuously revised and updated based on extensive feed-
back from students and faculty members as well as our own intuitions and judgments.
Whether a topic is fundamental or emerging we try to bring innovative content and ele-
ments to the book. For example, in this and the previous edition we have added new or
expanded discussions of the major types of marketing, branding, marketing’s role in
cross-functional strategic planning, the most current psychographic and geodemographic
segmentation approaches, organizing the sales force, relationship marketing in service
organizations, the difference between customers and clients in service organizations,
multichannel marketing, and a new section on Porter’s diamond model of national com-
petitive advantage. We have also changed the title and added content to chapter 6, “Prod-
uct and Brand Strategy” to better reflect current views of these topics.

We have altered two important elements in this edition. “Marketing Insights” replace
our previous “Marketing Highlights” feature. This is more than a simple name change. It
was done to more accurately reflect their purpose of helping students solve marketing
problems, analyze marketing cases, and develop marketing plans. More than 20 Market-
ing Insights have been added to this edition.

We have also added an “Additional Resources” section to the end of each chapter.
Previously, each chapter ended with a selection of additional readings. This change is
designed to highlight our focus on current resources which students can utilize in solv-
ing marketing problems, analyzing marketing cases, and developing marketing plans, as
well as assist in writing projects and case presentations. Each resource has been selected
with prospective students in mind. Our goal is to provide resources accessible to stu-
dents at various stages of marketing education given the wide spectrum of courses in
which the book is utilized.

UTILIZING THE PREFACE

This book has been used successfully in college courses and practical training that
require an overview of the critical aspects of marketing management and marketing strat-
egy development. It has been used:

• As a primary introductory text primarily at the undergraduate level.
• At the undergraduate and MBA level, where several AACSB core curriculum courses

are team-taught as one multidisciplinary 9-to-12 hour course.
• At the advanced undergraduate and MBA level where it is used as the content foun-

dation in courses that utilize marketing cases and problems.
• In short courses and executive development programs.

INSTRUCTIONAL RESOURCES

The Preface is accompanied by two expanded supplements. They were developed in response
to instructors’ requests. We offer a test bank of nearly 1,300 multiple-choice, true-false, and
brief essay questions. It is available in both print and EZ Test Online. We also offer Power-
Point slides that highlight key text material.

viii Preface

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ix

Acknowledgements
Our book is based on the works of many academic researchers and marketing practitioners.
We want to thank those individuals who contributed their ideas to develop the field of mar-
keting throughout the years. Indeed, our book would not be possible without their contri-
butions. We would also like to thank our teachers, colleagues, and students for their many
contributions to our education. We would also like to publicly acknowledge those individ-
uals who served as reviewers of this and previous editions. We appreciate their advice and
counsel and have done our best to reflect their insightful comments.

Roger D. Absmire
Sam Houston State University
Catherine Axinn
Syracuse University
Andrew Bergstein
Pennsylvania State University
Robert Brock Lawes
Chaminade University of Honolulu
Glenn Chappell
Meridith College
Newell Chiesl
Indiana State University
Reid P. Claxton
East Carolina University
Mike Dailey
University of Texas, Arlington
Linda M. Delene
Western Michigan University
James A. Eckert
Western Michigan University
Robert Finney
California State University, Hayward
Stephen Goldberg
Fordham University
Sol Klein
Northeastern University
Franklyn Manu
Morgan State University
Edward J. Mayo
Western Michigan University
Donald J. Messmer
College of William & Mary
Johannah Jones Nolan
University of Alabama, Birmingham
R. Stephen Parker
Southwest Missouri State University

Debu Purohit
Duke University
Gary K. Rhoads
Brigham Young University
Mike Ballif
University of Utah
Donald Brady
Millersville University
Lee Richardson
University of Baltimore
Matthew H. Sauber
Eastern Michigan University
Ronald L. Schill
Brigham Young University
Vernon R. Stauble
California State Polytechnic University
David Griffith
University of Oklahoma
Lawrence Hamer
DePaul University
Jack Healey
Golden State University
Betty Jean Hebel
Madonna University
JoAnne S. Hooper
Western Carolina University
David Horne
Wayne State University
Fred Hughes
Faulkner University
Benoy Joseph
Cleveland State University
Ann Marie Thompson
Northern Illinois University
John R. Thompson
Memphis State University

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x Acknowledgements

Gordon Urquhart
Cornell College
Kevin Webb
Drexel University
Kathleen R. Whitney
Central Michigan University
J. B. Wilkinson
University of Akron
Dale Wilson
Michigan State University
Eunkyu Lee
Syracuse University
Tina Lowrey
University of Texas at San Antonio
Albert Milhomme
Texas State University
Larry Crowson
University of Central Florida
Gerard DiBartolo
Salisbury University
Casey Donoho
Northern Arizona University
R. E. Evans
University of Oklahoma
Lawrence Feick
University of Pittsburgh
David Good
Grand Valley State University
Perry Haan
Tiffin University
Harry Harmon
Central Missouri
Catherine Holderness
University of North Carolina–Greensboro
Nicole Howatt
UCF

Anupam Jaju
GMU
Chris Joiner
George Mason University
Chip Miller
Drake University
David L. Moore
LeMoyne College
Joan Phillips
University of Notre Dame
Thomas Powers
University of Alabama at Birmingham
John Rayburn
University of Tennessee
Martha Reeves
Duke
Henry Rodkin
DePaul University
Alan Sawyer
University of Florida
Mark Spriggs
University of St. Thomas
Sean Valentine
University of Wyoming
Stacy Vollmers
University of St. Thomas
Anna Andriasova
University of Maryland University College
Ritesh Saini
George Mason University
Ana Valenzuela
Baruch College, CUNY
Matthew Elbeck
Troy University Dothan
Edward Bond
Bradley University

Working with professionals makes everything go smoothly. It is why being a McGraw-
Hill/Irwin author is a pleasure. Thank you to Doug Hughes, our editor, and to Gabriela
Gonzalez, editorial assistant, and welcome aboard. Special thanks to Robin Reed, project
manager, for so many contributions to this project. We are very grateful.

We also wish to acknowledge Michael Knetter, Dean of the School of Business at the
University of Wisconsin, and Devanthan Sudharshan, Dean of Gatton College of Business
and Economics at the University of Kentucky who have always supported our efforts.

J. Paul Peter

James H. Donnelly Jr.

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xi

Contents
SECTION I
ESSENTIALS OF MARKETING
MANAGEMENT 1

PART A
INTRODUCTION 1

Chapter 1
Strategic Planning and the Marketing
Management Process 2

The Marketing Concept 2
What Is Marketing? 3
What Is Strategic Planning? 4

Strategic Planning and Marketing Management 4
The Strategic Planning Process 5
The Complete Strategic Plan 14

The Marketing Management Process 14
Situation Analysis 14
Marketing Planning 17
Implementation and Control of the Marketing Plan 18
Marketing Information Systems and Marketing
Research 19

The Strategic Plan, the Marketing Plan, and
Other Functional Area Plans 19

Marketing’s Role in Cross-Functional Strategic
Planning 19

Conclusion 20
Appendix
Portfolio Models 23

PART B
MARKETING INFORMATION,
RESEARCH, AND UNDERSTANDING
THE TARGET MARKET 27

Chapter 2
Marketing Research: Process and Systems
for Decision Making 28

The Role of Marketing Research 28
The Marketing Research Process 29

Purpose of the Research 29
Plan of the Research 30
Performance of the Research 35
Processing of Research Data 35

Preparation of the Research Report 36
Limitations of the Research Process 36

Marketing Information Systems 38
Conclusion 39

Chapter 3
Consumer Behavior 40

Social Influences on Consumer Decision Making 41
Culture and Subculture 41
Social Class 42
Reference Groups and Families 43

Marketing Influences on Consumer Decision
Making 43

Product Influences 43
Price Influences 43
Promotion Influences 44
Place Influences 44

Situational Influences on Consumer Decision
Making 45
Psychological Influences on Consumer Decision
Making 45

Product Knowledge 45
Product Involvement 46

Consumer Decision Making 46
Need Recognition 47
Alternative Search 48
Alternative Evaluation 49
Purchase Decision 49
Postpurchase Evaluation 50

Conclusion 52

Chapter 4
Business, Government, and Institutional
Buying 53

Categories of Organizational Buyers 53
Producers 53
Intermediaries 54
Government Agencies 54
Other Institutions 54

The Organizational Buying Process 54
Purchase-Type Influences on Organizational Buying 55

Straight Rebuy 55
Modified Rebuy 55
New Task Purchase 55

Structural Influences on Organizational
Buying 56

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xii Contents

Purchasing Roles 56
Organization-Specific Factors 57
Purchasing Policies and Procedures 57

Behavioral Influences on Organizational
Buying 58

Personal Motivations 58
Role Perceptions 58

Stages in the Organizational Buying
Process 60

Organizational Need 61
Vendor Analysis 61
Purchase Activities 61
Postpurchase Evaluation 61

Conclusion 63

Chapter 5
Market Segmentation 64

Delineate the Firm’s Current
Situation 64
Determine Consumer Needs
and Wants 65
Divide Markets on Relevant Dimensions 65

A Priori versus Post Hoc Segmentation 66
Relevance of Segmentation Dimensions 66
Bases for Segmentation 67

Develop Product Positioning 73
Decide Segmentation Strategy 74
Design Marketing Mix Strategy 75
Conclusion 76

PART C
THE MARKETING MIX 77

Chapter 6
Product and Brand Strategy 78

Basic Issues in Product Management 78
Product Definition 78
Product Classification 79
Product Quality and Value 80
Product Mix and Product Line 81
Branding and Brand Equity 82
Packaging 86

Product Life Cycle 88
Product Adoption and Diffusion 91

The Product Audit 91
Deletions 91
Product Improvement 93

Organizing for Product Management 93
Conclusion 95

Chapter 7
New Product Planning and
Development 96

New Product Strategy 97
New Product Planning and Development
Process 99

Idea Generation 99
Idea Screening 101
Project Planning 102
Product Development 103
Test Marketing 103
Commercialization 104
The Importance of Time 104

Some Important New Product Decisions 105
Quality Level 105
Product Features 106
Product Design 106
Product Safety 107

Causes of New Product Failure 107
Need for Research 107

Conclusion 109

Chapter 8
Integrated Marketing Communications 110

Strategic Goals of Marketing
Communication 110

Create Awareness 110
Build Positive Images 110
Identify Prospects 110
Build Channel Relationships 111
Retain Customers 111

The Promotion Mix 111
Integrated Marketing Communications 112
Advertising: Planning and Strategy 114

Objectives of Advertising 114
Advertising Decisions 114

The Expenditure Question 115
The Allocation Question 118

Sales Promotion 122
Push versus Pull Marketing 122
Trade Sales Promotions 123
Consumer Promotions 124
What Sales Promotion Can and Can’t Do 124

Public Relations 126
Direct Marketing 126
Conclusion 127
Appendix
Major Federal Agencies Involved in Control
of Advertising 129

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Contents xiii

Chapter 9
Personal Selling, Relationship Building,
and Sales Management 130

Importance of Personal Selling 130
The Sales Process 131

Objectives of the Sales Force 131
The Sales Relationship-Building Process 132
People Who Support the Sales Force 138

Managing the Sales and Relationship-Building
Process 139

The Sales Management Task 139
Controlling the Sales Force 140
Motivating and Compensating Performance 144

Conclusion 144

Chapter 10
Distribution Strategy 146

The Need for Marketing Intermediaries 146
Classification of Marketing Intermediaries and
Functions 146
Channels of Distribution 148
Selecting Channels of Distribution 149

Specific Considerations 149
Managing a Channel of Distribution 152

Relationship Marketing in Channels 152
Vertical Marketing Systems 152

Wholesaling 155
Store and Nonstore Retailing 156

Store Retailing 156
Nonstore Retailing 157

Conclusion 160

Chapter 11
Pricing Strategy 161

Demand Influences on Pricing Decisions 161
Demographic Factors 161
Psychological Factors 161
Price Elasticity 162

Supply Influences on Pricing Decisions 163
Pricing Objectives 163
Cost Considerations in Pricing 163
Product Considerations in Pricing 165

Environmental Influences on Pricing
Decisions 166

Competition 166
Government Regulations 166

A General Pricing Model 167
Set Pricing Objectives 167
Evaluate Product–Price Relationships 167

Estimate Costs and Other Price Limitations 168
Analyze Profit Potential 169
Set Initial Price Structure 169
Change Price as Needed 170

Conclusion 170

PART D
MARKETING IN SPECIAL FIELDS 171

Chapter 12
The Marketing of Services 172

Important Characteristics of Services 174
Intangibility 174
Inseparability 175
Perishability and Fluctuating Demand 176
Client Relationship 176
Customer Effort 177
Uniformity 178

Providing Quality Services 178
Customer Satisfaction Measurement 180
The Importance of Internal Marketing 180

Overcoming the Obstacles in Service Marketing 182
Limited View of Marketing 182
Limited Competition 182
Noncreative Management 183
No Obsolescence 183

The Service Challenge 184
Banking 184
Health Care 184
Insurance 185
Travel 185
Implications for Service Marketers 186

Conclusion 187

Chapter 13
Global Marketing 188

The Competitive Advantage of Nations 189
Organizing for Global Marketing 190

Problems with Entering Foreign Markets 190
Organizing the Multinational Company 193

Programming for Global Marketing 195
Global Marketing Research 195
Global Product Strategy 198
Global Distribution Strategy 198
Global Pricing Strategy 199
Global Advertising and Sales Promotion
Strategy 199

Entry and Growth Strategies for Global Marketing 200
Conclusion 203

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xiv Contents

SECTION II
ANALYZING MARKETING PROBLEMS
AND CASES 205

A Case Analysis Framework 206
1. Analyze and Record the Current Situation 207
2. Analyze and Record Problems and Their Core
Elements 211
3. Formulate, Evaluate, and Record Alternative Courses
of Action 212
4. Select and Record the Chosen Alternative and
Implementation Details 213

Pitfalls to Avoid in Case Analysis 213
Communicating Case Analyses 216

The Written Report 216
The Oral Presentation 218

Conclusion 218

SECTION III
FINANCIAL ANALYSIS FOR
MARKETING DECISIONS 219

Financial Analysis 220
Break-Even Analysis 220
Net Present Value Analysis 222
Ratio Analysis 224

Conclusion 228

SECTION IV
DEVELOPING MARKETING PLANS 229

A Marketing Plan Framework 230
Title Page 231
Executive Summary 231
Table of Contents 232
Introduction 232
Situational Analysis 232
Marketing Planning 232
Implementation and Control of the Marketing Plan 234
Summary 236
Appendix—Financial Analysis 236
References 239

Conclusion 239

Chapter Notes 241

Index 248

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Introduction APart
1 Strategic Planning and the Marketing Management Process

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Part A
Introduction

2

Chapter 1
Strategic Planning
and the Marketing
Management Process
The purpose of this introductory chapter is to present the marketing management process
and outline what marketing managers must manage if they are to be effective. In doing so,
it will also present a framework around which the remaining chapters are organized. Our
first task is to review the organizational philosophy known as the marketing concept, since
it underlies much of the thinking presented in this book. The remainder of this chapter will
focus on the process of strategic planning and its relationship to the process of marketing
planning.

THE MARKETING CONCEPT

Simply stated, the marketing concept means that an organization should seek to make a
profit by serving the needs of customer groups. The concept is very straightforward and has
a great deal of commonsense validity. Perhaps this is why it is often misunderstood,
forgotten, or overlooked.

The purpose of the marketing concept is to rivet the attention of marketing managers on
serving broad classes of customer needs (customer orientation), rather than on the firm’s
current products (production orientation) or on devising methods to attract customers to
current products (selling orientation). Thus, effective marketing starts with the recognition
of customer needs and then works backward to devise products and services to satisfy these
needs. In this way, marketing managers can satisfy customers more efficiently in the
present and anticipate changes in customer needs more accurately in the future. This means
that organizations should focus on building long-term customer relationships in which the
initial sale is viewed as a beginning step in the process, not as an end goal. As a result, the
customer will be more satisfied and the firm will be more profitable.

The principal task of the marketing function operating under the marketing concept is not
to manipulate customers to do what suits the interests of the firm, but rather to find effective
and efficient means of making the business do what suits the interests of customers. This is
not to say that all firms practice marketing in this way. Clearly, many firms still emphasize
only production and sales. However, effective marketing, as defined in this text, requires that
consumer needs come first in organizational decision making.

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One qualification to this statement deals with the question of a conflict between con-
sumer wants and societal needs and wants. For example, if society deems clean air and
water as necessary for survival, this need may well take precedence over a consumer’s want
for goods and services that pollute the environment.

WHAT IS MARKETING?

Everyone reading this book has been a customer for most of his or her life. Last evening you
stopped into a local supermarket to graze at the salad bar, pick up some bottled water and a bag
of Fritos corn chips. While you were there, you snapped a $1.00 coupon for a new flavor salad
dressing out of a dispenser and tasted some new breakfast potatoes being cooked in the back
of the store. As you sat down at home to eat your salad, you answered the phone and someone
suggested that you need to have your carpets cleaned. Later on in the evening you saw TV
commercials for tires, soft drinks, athletic shoes, and the dangers of smoking …

1. Discussion1_Accounting for leaders : 2 page references in APA format:

During week eight we will be focused on cost volume profit analysis. We will be looking at the ways that cost, volume, and profit interact. This can be critical for a business to understand. Failure to understand these items can lead to a business failing. For our discussion board post in week four please be sure to read chapter 7. Then locate a news article about a store or business that has shut down and provide a link to the article. Then provide a summary of the article in your own words and brainstorm why this business or store may have failed. Then answer the question “What are some aspects of cost volume profit that may have been at play that led to the closure of this business?” Be sure to integrate the concepts of cost volume profit that you are learning about this week into your post.
2.
Discussion2_Marketing Strategies : 2 page references in APA format use text books as reference’s:

Choose appropriate marketing channels Describe sales promotion and analyze its effectiveness Explain the role public relations can play in integrated marketing communications Describe the elements of the promotional mix and how they might be measured to ensure a positive return investment. When we talk about promotional mix what exactly do we mean and how does this help us in our marketing process? After reviewing this week’s resources and your research, in your own words how would you explain promotional mix and how it helps in the marketing process? Share one of the elements and apply it to a product you personally use. How would use the element to promote the product for a new market segment and why?

Cost-Volume-Profit Analysis
Chapter 7
McGraw-Hill/Irwin

7-1
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of McGraw-Hill Education.

Chapter 7: Cost-Volume-Profit Analysis

Learning Objective 7-1 – Compute a break-even point using the contribution-margin approach and the equation approach.
7-2
7-2
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of McGraw-Hill Education.

Learning Objective 7-1. Compute a break-even point using the contribution-margin approach and the equation approach.

The Break-Even Point
The break-even point is the point in the volume of activity where the organization’s revenues
and expenses are equal.

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The break-even point is the volume of activity where the organization’s revenues and expenses are equal. At this amount of sales, the organization has no profit or loss; it breaks even. Notice that this income statement highlights the distinction between variable and fixed expenses.

The statement also shows the total contribution margin, which is defined as total sales revenue minus total variable expenses. Total contribution margin is the amount of revenue that is available to contribute to covering fixed expenses after all variable expenses have been covered. (LO 7-1)

Equation Approach
Sales revenue – Variable expenses – Fixed expenses = Profit

Unit
sales
price
Sales
volume
in units
×

Unit
variable
expense
Sales
volume
in units
×

($500 × X)
($300 × X)


$80,000 = $0
($200X)

$80,000 = $0
X = 400 surfboards
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Curl, Inc. manufactures surfboards. Each surfboard sells for $500 and has variable costs of $300.

The equation approach can be used to find the break-even point. Income (or profit) is equal to sales revenue minus expenses. Expenses can be separated in variable and fixed expenses. At the break-even point, net income is $0. (LO 7-1)

Learning Objective 7-2 – Compute the contribution-margin ratio and use it to find the break-even point in sales dollars.
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Learning Objective 7-2. Compute the contribution-margin ratio and use it to find the break-even point in sales dollars.

Contribution-Margin Approach (1/3)
For each additional surfboard sold, Curl generates $200 in contribution margin.

Consider the following information developed by the accountant at Curl, Inc.:

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The contribution margin per unit is $200 ($500 sales less variable expenses of $300 per unit). When enough surfboards are sold so that the total contribution margin is $80,000, Curl, Inc. will break even for the period. (LO 7-2)

Contribution-Margin Approach (2/3)
Fixed expenses
Unit contribution margin
=
Break-even point
(in units)

$80,000
$200
= 400 surfboards

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To compute the break-even volume of surfboards, divide the total fixed expenses by the unit contribution margin. For Curl, Inc., $80,000 is divided by $200, which equates to 400 surfboards. That means that the company must sell 400 surfboards to break-even. (LO 7-2)

Contribution-Margin Approach (3/3)
Here is the proof!

400 × $500 = $200,000

400 × $300 = $120,000

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The break-even point of 400 units can be proven by first calculating total sales: multiply $500 × 400 units for $200,000 in total sales. The variable expenses are $300 per unit × 400 units, which is $120,000. Total sales less total variable expenses is total contribution margin of $80,000. When fixed expenses of $80,000 are deducted from the total contribution margin, leaving $0 in net income. (LO 7-2)

Contribution Margin Ratio (1/2)
Calculate the break-even point in sales dollars rather than units by using the contribution margin ratio.
Contribution margin
Sales
= CM Ratio

Fixed expense
CM Ratio
Break-even point
(in sales dollars)
=

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Sometimes management prefers that the break-even point be expressed in sales dollars rather than units. This can be accomplished by using the contribution margin ratio. The formula for the contribution margin ratio is contribution margin divided by sales. Then divide fixed expenses by the contribution margin ratio to determine the total sales dollars at the break-even point. (LO 7-2)

Contribution Margin Ratio (2/2)
$80,000
40%
$200,000 in sales
=

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For Curl, Inc., the fixed costs of $80,000 are divided by the contribution margin ratio of 40% to determine the break-even sales of $200,000. (LO 7-2)

Learning Objective 7-3 – Prepare a cost-volume-profit (CVP) graph and explain how it is used.
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Learning Objective 7-3. Prepare a cost-volume-profit (CVP) graph and explain how it is used.

Graphing Cost-Volume-Profit Relationships
Viewing CVP relationships in a graph gives managers a perspective that can be obtained in no other way.
Consider the following information for Curl, Inc.:

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While the break-even point conveys useful information to management, it does not show how profit changes as activity changes. Managers will often use a cost-volume-profit (CVP) graph to show the relationship between profit and volume of activity. Consider Curl, Inc. At sales of 300 unit, Curl Inc. incurs a net loss of $20,000. The break-even point occurs at 400 units and a $20,000 profit occurs when sales are at 500 units. (LO 7-3)

Cost-Volume-Profit Graph (Steps 1-3)

Fixed expenses

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In step 1, the horizontal and vertical axes are drawn. The vertical axis of the graph is dollars and the horizontal axis is units of sales.

In step 2, the fixed-expense line is drawn. It is parallel to the horizontal axis, since fixed expenses do not change with activity.

In step 3, compute the total expenses at any volume. Plot that point. For Curl, Inc., look at 400 units. Multiply the unit variable expenses of $300 per unit times 400 units for total variable expenses of $120,000. Add the variable expense to the fixed expenses of $80,000. So at the 400 unit level, total expenses are $200,000. (LO 7-3)

Cost-Volume-Profit Graph (Step 4)

Fixed expenses

Total expenses
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In step 4, the total expense line is drawn. Since the total expenses at zero units sold is only the fixed costs, the total expense line crosses the vertical axis at the amount of fixed costs. This line then passes through the point plotted in step 3. (LO 7-3)

Cost-Volume-Profit Graph (Step 5)

Fixed expenses

Total expenses

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In step 5, compute the total sales revenue at any volume. Plot that point. For Curl, Inc., look at 500 units. Multiply the unit sales price of $500 per unit times 500 units for total sales revenue of $250,000. (LO 7-3)

Cost-Volume-Profit Graph (Step 6)

Fixed expenses

Total expenses

Total sales
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In step 6, draw the total revenue line. This line passes through the point plotted in step 5 and the origin. (LO 7-3)

Cost-Volume-Profit Graph (Step 7)

Fixed expenses

Total expenses

Total sales
Break-even
point
Profit area
Loss area

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In step 7, the break-even point, the profit area, and the loss area are all labeled. The break-even point is the point at which total expenses and total sales are equal, which is where the two lines cross. The profit area is the area where the total sales line is above the total expenses line. This is where revenues exceed expenses. The loss area is the area where the total expenses line is above the total sales line. This is where expenses exceeds revenues. (LO 7-3)

Profit-Volume Graph
Some managers like the profit-volume
graph because it focuses on profits and volume.

Loss area
Profit area
Break-even
point

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Yet another approach to graphing cost-volume-profit relationships is called a profit-volume graph. It highlights the amount of profit or loss. The graph intercepts the vertical axis at the amount equal to fixed expenses at the zero activity level. The graph crosses the horizontal axis at the break-even point. The vertical distance between the horizontal axis and the profit line, at a particular level of sales volume, is the profit or loss at that volume. (LO 7-3)

Learning Objective 7-4 – Apply CVP analysis to determine the effect on profit of changes in fixed expenses, variable expenses, sales prices, and sales volume.
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Learning Objective 7-4. Apply CVP analysis to determine the effect on profit of changes in fixed expenses, variable expenses, sales prices, and sales volume.

Target Net Profit
We can determine the number of surfboards that Curl, Inc. must sell to earn a profit of $100,000 using the contribution margin approach.
Fixed expenses + Target profit
Unit contribution margin
Units sold to earn
the target profit

$80,000 + $100,000
$200
= 900 surfboards

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When a company has a net profit they are trying to achieve, or a target net profit, the contribution margin approach can be used to determine the number of units that must be sold. This is very similar to finding the break-even point. The numerator is equal to fixed expenses plus the target profit. The denominator is the contribution margin per unit. The result is the units that need to be sold to earn the targeted net profit. (LO 7-4)

$80,000 + $100,000
$200

Equation Approach
Sales revenue – Variable expenses – Fixed expenses = Profit

($500 × X)
($300 × X)


$80,000 = $100,000
($200X)
= $180,000
X = 900 surfboards
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The equation approach can also be used to find the units of sales required to earn a target net profit. Recall that in the profit equation, profit is equal to revenues minus variable and fixed expenses. Recall that profit was set to zero to determine the break-even point. When management has determined a target net profit greater than zero, that number becomes the profit variable in the equation. (LO 7-4)

Applying CVP Analysis
Safety Margin
The difference between budgeted sales revenue and break-even sales revenue
The amount by which sales can drop before losses occur
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The safety margin of an enterprise is the difference between the budgeted sales revenue and the break-even sales revenue. This is the amount by which sales can drop before losses occur. (LO 7-4)

Safety Margin
Curl, Inc. has a break-even point of
$200,000 in sales. If actual sales are $250,000, the safety margin is $50,000, or 100 surfboards.

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For example, Curl, Inc. has a break-even point when sales are $200,000. If actual sales are $250,000, the margin of safety is $50,000, which is 100 surfboards. (LO 7-4)

Changes in Fixed Costs (1/3)
Curl, Inc. is currently selling 500 surfboards per year.
The owner believes that an increase of $10,000 in the annual advertising budget would increase sales to 540 units.
Should the company increase the advertising budget?
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What would happen to a company’s break-even point if fixed expenses change? Suppose the owner wanted to increase advertising by $10,000 per year in hopes that sales will increase to 540 units. (LO 7-4)

Changes in Fixed Costs (2/3)

$80,000 + $10,000 advertising = $90,000

540 units × $500 per unit = $270,000
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If the additional advertising is effective and sales increases to 540 boards, sales revenue would be $270,000, variable expenses would be $162,000 and the contribution margin would be $108,000. Fixed expenses would now be $90,000 and therefore, net income would be $18,000. Net income at the current level is $20,000. (LO 7-4)

Changes in Fixed Costs (3/3)
Sales will increase by
$20,000, but net income will
decrease by $2,000.
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So even though sales would increase from $250,000 to $270,000, net income would decrease by $2,000. (LO 7-4)

Changes in Unit
Contribution Margin (1/2)
Because of increases in cost of raw materials, Curl’s variable cost per unit has increased from $300 to $310 per surfboard. With no change in selling price per unit, what will be the new break-even point?
($500 × X)
($310 × X)


$80,000 = $0
X = 422 units (rounded)
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When the variable cost per unit changes, this effects the contribution margin per unit. In turn, the break-even point would also be changed. Look at Curl, Inc. Suppose the variable cost per unit increases to $310, but there is no change in selling price. Using the equation approach, we find that the new break-even point is 422 units, instead of 400 units. (LO 7-4)

Changes in Unit
Contribution Margin (2/2)
Suppose Curl, Inc. increases the price of each surfboard to $550. With no change in variable cost per unit, what will be the new break-even point?
($550 × X)
($300 × X)


$80,000 = $0
X = 320 units
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Changing the unit sales price will also alter the unit contribution margin. Suppose the price is raised from $500 to $550. This change will raise the unit contribution margin from $200 to $250.
The new break-even point will be 320 units ($80,000 ÷ $250). A $50 increase in the sales price will lower the break-even point from 400 to 320 surfboards.

But is this change desirable? A lower break-even point may seem like a good thing if sales are slow. However, Curl, Inc. may be more likely to at least break even with a lower sales price. Maybe sales volume would drop dramatically if the price is raised to $550. Management must try to predict the reaction of the consumers. CVP analysis provides valuable information, but it is only one of several elements that influence management’s decisions. (LO 7-4)

Predicting Profit Given Expected Volume (1/2)
Fixed expenses
Unit contribution margin
Target net profit
Find: {req’d sales volume}
Given:

Fixed expenses
Unit contribution margin
Expected sales volume
Find: {expected profit}
Given:

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So far, we have focused on finding the required sales volume to break even or achieve a particular target net profit. We can also use CVP analysis to determine the expected profit if fixed expenses, unit contribution margin, and expected sales volume are known. (LO 7-4)

Predicting Profit Given
Expected Volume (2/2)
In the coming year, Curl’s owner expects to sell 525 surfboards. The unit contribution margin is expected to be $190, and fixed costs are expected to increase to $90,000.
($190 × 525)

$90,000 = X
X = $9,750 profit
X = $99,750 – $90,000
Total contribution – Fixed cost = Profit
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For example, Curl, Inc. expects to sell 525 surfboards in the coming year. Variable costs are expected to increase, which would reduce the unit contribution margin to $190. Fixed costs are also expected to increase to $90,000. The expected profit can be determined by first determining the total contribution. This is the unit contribution times the number of units sold. By deducting the fixed costs, we can see that the expected profit would be $9,750. (LO 7-4)

Learning Objective 7-5 – Compute the break-even point and prepare a profit-volume graph for a multiproduct enterprise.
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Learning Objective 7-5. Compute the break-even point and prepare a profit-volume graph for a multiproduct enterprise.

CVP Analysis with Multiple Products (1/2)
For a company with more than one product, sales mix is the relative combination in which a company’s products are sold.

Different products have different selling prices, cost structures, and contribution margins.

Let’s assume Curl, Inc. sells surfboards and sailboards and see how we deal with break-even analysis.
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If a company sells more than one product, the relative combination in which a company’s products are sold is referred to as the sales mix. With different selling prices, contribution margins, and fixed costs, it now becomes more difficult to determine the break-even point. Let’s assume that Curl, Inc. also sells sailboards. (LO 7-5)

CVP Analysis with Multiple Products (1/2)
Curl provides us with the following information:

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The unit selling price, variable cost, and contribution margin are known for each of the two products that Curl, Inc. sells. Surfboards make up 62.5% of Curl’s total sales and the sailboards make up the other 37.5%. (LO 7-5)

CVP Analysis with Multiple Products – Weighted-Average Contribution Margin
Weighted-average unit contribution margin

$200 × 62.5%

$550 × 37.5%

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The sales mix is used to compute a weighted-average unit contribution margin. This is the average of all products’ unit contribution margins, weighted by the relative sales proportion of each product. For Curl, surfboards have a unit contribution margin of $200, which is multiplied by the 62.5% sales proportion. The weighted contribution margin for the surfboards is $125. The same formula is used to calculate the weighted contribution margin for sailboards, which is $206.25. The total weighted average contribution margin for Curl’s products is $331.25. (LO 7-5)

CVP Analysis with Multiple Products –
Break-even Point (1/2)
Break-even point
Break-even
point
=
Fixed expenses
Weighted-average unit contribution margin
Break-even
point
=
$170,000
$331.25
Break-even
point
=
514 combined unit sales

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The break-even point can be calculated using the contribution margin approach. The total fixed costs are divided by the weighted average unit contribution margin. For Curl, the calculation is $170,000 divided by $331.25, which is 514 total units to be sold. (LO 7-5)

Break-even point
Break-even
point
=
514 combined unit sales

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CVP Analysis with Multiple Products –
Break-even Point (2/2)
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The total units are then multiplied by the relative sales proportion to determine the individual product sales. The number of surfboards to be sold at the break-even point, 514 units, is multiplied by 62.5%, which equals 321 units. 514 is multiplied by 37.5% to determine that 193 sailboards must be sold to break-even. The break-even point of 514 units per year is valid only for the sales mix assumed in computing the weighted-average unit contribution margin. (LO 7-5)

Learning Objective 7- 6 – List and discuss the key assumptions of CVP analysis.
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Learning Objective 7-6. List and discuss the key assumptions of CVP analysis.

Assumptions Underlying
CVP Analysis
Selling price is constant throughout the entire relevant range.
Costs are linear over the relevant range.
In multi-product companies, the sales mix is constant.
In manufacturing firms, inventories do not change (units produced = units sold).
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For any cost-volume-profit analysis to be valid, the following important assumptions must be reasonably satisfied within the relevant range.
1. The behavior of total revenue is linear (straight-line). This implies that the price of the product or service will not change as sales volume varies within the relevant range.
2. The behavior of total expenses is linear (straight-line) over the relevant range. This implies the following more specific assumptions.
a. Expenses can be categorized as fixed, variable, or semivariable. Total fixed expenses remain constant as activity changes, and the unit variable expense remains unchanged as activity varies.
b. The efficiency and productivity of the production process and workers remain constant.
3. In multiproduct organizations, the sales mix remains constant over the relevant range.
4. In manufacturing firms, the inventory levels at the beginning and end of the period are the same. This implies that the number of units produced during the period equals the number of units sold.
(LO 7-6)

Learning Objective 7-7 – Prepare and interpret a contribution income statement.
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Learning Objective 7-7. Prepare and interpret a contribution income statement.

CVP Relationships and the
Income Statement (1/2)

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On a traditional income statement, cost of goods sold includes both variable and fixed manufacturing costs, as measured by the firm’s product-costing system. The gross margin is computed by subtracting cost of goods sold from sales. Selling and administrative expenses are then subtracted; each expense includes both variable and fixed costs. The traditional income statement does not disclose the breakdown of each expense into its variable and fixed components. (LO 7-7)

CVP Relationships and the
Income Statement (2/2)

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Many operating managers find the traditional income-statement format difficult to use, because it does not separate variable and fixed expenses. Instead they prefer the contribution income statement. The contribution format highlights the distinction between variable and fixed expenses. On the contribution income statement, all variable expenses are subtracted from sales to obtain the contribution margin. All fixed costs are then subtracted from the contribution margin to obtain net income.
Operating managers frequently prefer the contribution income statement, because its separation of fixed and variable expenses highlights cost-volume-profit relationships. It is readily apparent from the contribution-format statement how income will be affected when sales volume changes by a given percentage. (LO7-7)

Learning Objective 7-8 – Explain the role of cost structure and operating leverage in CVP relationships.
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Learning Objective 7-8. Explain the role of cost structure and operating leverage in CVP relationships.

Cost Structure and Operating Leverage
The cost structure of an organization is the relative proportion of its fixed and variable costs.

Operating leverage is:
the extent to which an organization uses fixed costs in its cost structure.
greatest in companies that have a high proportion of fixed costs in relation to variable costs.
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The cost structure of an organization is the relative proportion of its fixed and variable costs. Cost structures differ widely among industries and among firms within an industry. A company using a computer-integrated manufacturing system has a large investment in plant and equipment, which results in a cost structure dominated by fixed costs. In contrast, a building contractor’s cost structure has a much higher proportion of variable costs. The highly automated manufacturing firm is capital-intensive, whereas the home building contractor is labor-intensive. An organization’s cost structure has a significant effect on the sensitivity of its profit to changes in volume.
The extent to which an organization uses fixed costs in its cost structure is called operating leverage. The operating leverage is greatest in firms with a large proportion of fixed costs, low proportion of variable costs, and the resulting high contribution margin ratio. (LO 7-8)

Measuring Operating Leverage (1/3)
Contribution margin
Net income
Operating leverage
factor
=

$100,000
$20,000
= 5

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The managerial accountant can measure a firm’s operating leverage, at a particular sales volume, using the operating leverage factor. The formula is contribution margin divided by net income.
At sales of 500 surfboards, Curl’s contribution margin is $100,000 and net income is …

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