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Marketing Cost Analysis / 83

Patrick M. Dunne and Harry I. Wolk

Marketing Cost Analysis:A Modularized ContributionApproachFor managers concerned with the profitability of their variousproducts, territories, and types of customers.

I N recent years, an increasing use of accountinginformation for planning, controlling, and

evaluating the firm's marketing performance hasbeen advocated in the literature.' Some of this pub-lished material is very sophisticated, and indeedthere is almost no limit to how far one can go inanalyzing the effectiveness of marketing operationsby accounting techniques. At the same time, it istruly astounding that many marketing managers donot use even some of the more elementary account-ing tools that are available.

The authors know of one company whereProduct X was generating an annual profit of$800,000, and Product Y was losing money at therate of $600,000 per year—and management wastotally unaware of the situation, just pleasantlyhappy to be making $200,000! They were simplyastounded when a little accounting by product linerevealed Product Y to be such a drain.

Not quite that elementary, but still well withinthe group of non-accounting trained managers, isthe modular contribution-margin income statement.This technique spotlights the behavior of controlla-ble costs and indicates each segment's contributionto profit and indirect fixed costs. It is a very usefultool for marketing managers who are concerned notonly with the efficiency of the operation for whichthey are responsible, but also with the profitability

About the AuthorsPATRICK M. DUNNE is Associate Professor of Mar-keting, Texas Tech University, Lubbock.HARRY I. WOLK is a Professor of Accounting, DrakeUniversity, Des Moines.

of the product, various territories, channels, typesand sizes of customer, etc.

In order to generate accounting informationfor specific market segments, a detailed data base isa necessity. All transactions entering the systemmust be classified and coded so that costs can bematched with revenues at desired aggregationlevels for different combinations of relevant factors.But the payoff is usually worth the effort. The mod-ular contribution margin approach to marketinganalysis enables management (a) to judge theprofitability of a specific marketing mix in a specificarea and (b) to decide whether or not to take actionto change it.

Case ExampleConsider the D-W Appliance Company, a smallappliance manufacturer that produces blenders andmixers on separate production lines. The firm'smarketing division is organized along territoriallines (East and West), and the products are sold bysales representatives through two marketing chan-nels: (1) to wholesalers, who, in turn, distribute tosmall retailers, and (2) directly to large retailers.Order size is also important: channel costs are lowerfor orders of 100 units or more of either product.

If the Marketing Division Manager wanted toassess the profitability of his functional area, hemight request an income statement. Under thefull-cost approach to financial statements, costswould be separated according to function: cost ofgoods sold and operating expenses. A portion of thegeneral expense of the company cost centers (ac-counting, corporate headquarters, etc.) would arbi-

84 / Journal of Marketing, July 1977

EXHIBIT 1Income Statement Models

Full-Cost Approach

RevenueLess: Cost of Goods Sold

Gross MarginLess: Operating Expenses

(Including th» division's allocatod share of companyadministrative and general expenses.)

Net Income

Contribution iVIargin Approach

RevenueLess: Variable Manufacturing Costs

Other Variable Costs directly traceable to thesegment.

Contribution MarginLess: Fixed Costs directly traceable to products.

Fixed Costs directly traceable to the market segment.

Segment Net Income

trarily be allocated to the operating expense of theMarketing Division. (See Exhibit 1.)

This type of statement is, however, bettersuited to external reporting than to internal man-agerial planning and control, since it contains costswhich do not directly affect decisions in the market-ing area and which are not controllable by the Mar-keting Division Manager. Furthermore, in order toapply variance analysis to this kind of statement,comparing budgeted results with actual results forcontrol purposes, the costs would first have to beseparated by activity before the analysis could dis-tinguish between cost changes in the level of anactivity and those due to other causes.

The main advantage of the modular contribu-tion margin approach as a managerial tool for plan-ning and control is that it separates costs, by behav-ior, into variable and fixed costs.^

Variable costs are those costs which vary pre-dictably with some measure of activity during agiven time period. For example, commissions onsales for D-W are set at 10% of sales revenue.Total commission expense varies as sales vary.

Fixed costs, on the other hand, are costs whichdo not change in the short-run, e.g., the MarketingDivision Manager's salary.

Cost Behavior and ControllabilityThe modular contribution margin model, which al-lows separation of costs by behavior, can be ex-

panded to include separation of costs by controlla-bility.

Controllable costs are those costs which origi-nate in the particular organizational unit underconsideration. Whether a cost is classified as con-trollable or uncontrollable obviously depends onthe organizational segment under consideration.Territorial expenses in the statement for East Terri-tory would be controllable costs for that territoryand for the Marketing Division, but not for theWest Territory.

As just suggested, controllability relates tothe degree of influence over a cost by the relevantdivision manager. Labor costs that exceed stan-dard costs for actual production in a particulardepartment are a classic example of a cost forwhich the appropriate manager would be held ac-countable. However, even for this classification, agreat deal of care must be exercised. Actual con-trollable labor costs may exceed standard becauseof many reasons beyond the manager's scope orcontrol. For example, delivery time for shipmentsmay be delayed by severe weather. Furthermore,controllability may be constrained by economicexternalities. Selling costs would be a controllablevariable cost of the Marketing Division, while themanager probably has little, if any, influence overa price decline precipitated by a competitor's ac-tion.

Controllable fixed costs are rarely controllablein the very short run. Once a fixed asset is ac-quired, there is virtually no control over the an-nual depreciation charges. One may select the de-preciation method, but no differences will arisebetween actual and budgeted costs except in thosesituations where depreciation can be calculated onusage. There are, however, some intermediate-term fixed costs (often called discretionary or pro-grammed costs because they are determined an-nually on a budgetary basis) which may be highlycontrollable; i.e., actual costs may exceedbudgeted costs. Advertising and R&D costs fallinto this category.

Uncontrollable variable costs are variable costswhich are not incurred in the segment under con-sideration. Therefore, the costs should be ex-pressed as standard costs so that a manager willnot be held responsible for the inefficiencies ofanother department. Variable manufacturing costs

ControllableVariable Costs

ControllableFixed Costs

UncontrollableVariable Costs

UncontrollableFixed Costs


of blenders and mixers would be indirect variablecosts for the Marketing Division, and should beexpressed in the budget at standard costs.

Uncontrollable fixed costs are not included insegmental income statements since any basis ofallocation to the segment would necessarily be ar-bitrary. Uncontrollable costs are often calledcommon costs and for the Marketing Divisionwould include a portion of those costs of the cor-porate headquarters and those manufacturingcosts which couldn't be directly allocated toblenders and mixers, such as the plant manager'ssalary.

Segmental AnalysisContribution margin income statements by de-partment are useful for budgeting, performanceanalysis, short-run decision-making, pricing, anddecisions between alternatives—e.g., whether toclose down a warehouse or relocate it; whether tolease a fleet of trucks or own them. Market seg-ment income statements are also useful for suchmarketing decisions as whether to drop a productline and whether to alter the physical distributionsystem; and they aid in the redirection of effort tothe company's more profitable markets. The usualmarket segmentation is by product line, territory,channel, order size, and customer, but any of thesegmentation bases of the marketing matrix of thefirm's target markets could be used.

A modular data base also facilitates statementsfocusing on functional areas, depending on man-agement's judgment about what information is rel-evant for decision-making and control. For example,if transportation is judged to be a crucial function inthe case of blenders, then the expense for shippingblenders would be coded by that function and bythe relevant variables (territory, channel, product,order size, customer, date). Revenue, in turn,would be coded at the time of each transaction.

Unless the company's information system issomewhat sophisticated, there is usually some in-tial difficulty in constructing accounting statementsof functional/departmental areas.^ Costs for aspecific department must be broken out of thenatural accounts via estimation techniques. (Sincecosts are usually accumulated in natural accounts,such as salary expense, the salary expense for theMarketing Division would have to be calculated.)

Under the modular contribution margin ap-proach not all costs are allocated to segments.Rather, only those costs are considered whichwould disappear if the company were to drop thatdepartment or segment. Note that this is acceptable

only for purposes of internal decision-making, andnot for differential cost justification under theRobinson-Patman Act (as demonstrated in the Bor-den case) or for general financial reporting purposes(audited reports to stockholders, IRS returns, andSEC reports).

Allocation of CostsOther refinements can be added to the modularcontribution margin model. The charge for thespecific assets used by the department (deprecia-tion) could be based on the decline in the marketvalue of the resources during the period. Or aninterest charge on the working capital used by thedepartment (based on the firm's actual cost of capi-tal) could be included to give a clear picture of thedepartment's operations and actual contribution.

Allocation, however, cannot be made arbitrar-ily on the basis of sales volume since that focusmight overlook other relevant information. For ex-ample, how do you attach distribution expense toblenders and mixers for a mixed shipment of bothproducts, when blenders are bulkier, heavier, andrequire more handling? Or if mixers are easy to sellto large retailers, while blenders require extensivesales effort, the entry of salesmen's expenses toblenders and mixers should reflect this difference.

If costs are based on a factor such as weight orspace occupied, this may allow an equitable basis ofcost assignment. This does not always happen,though, and so assigning costs to departments onthe basis of weight can be highly misleading foranalytical purposes. Suffice it to say that wherevervariable costs are predictable and vary with a givenbase, standard costs should be used in budgetingfor the Marketing Division.

The value of a modular contribution marginstatement is the ability to match costs with reve-nues for the smallest market segments desired andthen to aggregate these modules into statements forlarger segments. Essentially, the modular data baseprovides management with the capability of trans-forming accounting information into two systems:one based on departments within the firm, theother based on market segments.

Useful InformationThe flexibility and responsiveness of the modularcontribution margin approach for market segmentscan be shown by applying it to the D-W ApplianceCompany. The first step is for management to de-cide on the relevant factors for examination. In thisexample, product line was chosen as the basic unit ofinterest, and the market was further segmented by


EXHIBIT 2Segmental Contribution Income Statements: D-W Appliance Company

EXHIBIT 6Blenders (both Territories)

Contribution Margin $392,705

Segment Income $157,705

EXHIBIT 7Blenders—East Territory



EXHIBIT 10Blenders—West Territory



EXHIBIT 8Wholesaler Channel

Contribution Margin$150,728

Segment Income$76,148

EXHIBIT 8ASmall Orders:Wholesalers



EXHIBIT 8BLarge Orders:Wholesalers



EXHIBIT 9Large RetailerChannelContribution Margin

$73,528


EXHIBIT 9ASmall Orders:Large Retailers



EXHIBIT 9BLarge Orders:Large Retailers












EXHIBIT 12Large Retailer Channel



EXHIBIT 12ASmali Orders:Large Retailers







EXHIBIT 5Budgeted Income StatementCorporate Level, 1977

RevenuesVariable Costs,

TotalContribution

MarginFixed Costs,

TotalNet Loss

$2,984,000

2,205,695

778,305 (26.1%)

787,000($8,695) (0.3%)

Percentages shown are based on revenues

EXHIBIT 14Mixers—East

1Territory

Contribution Margin

Segment Income

$183,

$133,

900

Oil




EXHIBIT 16Large RetailerChannel












EXHIBIT 13Mixers (both

1Territories)

Contribution Margin

Segment Income

$385

$263

,600

,600




EXHIBIT 17Mixers—West Territory






EXHIBIT 19Large RetailerChannel
















Exhibit 3D-W Appiiance CompanyiVIaster Cost Data Sheet for 1977

Revenue(per unit)

Variable Manu-facturing Costs

Variable SellingCosts (10% ofrevenue)

Total

Contribution Mar-gin Per Unit Be-fore Channel Costs

ProgrammedAdvertising Costs'

Budgeted Sales(units)

EastBlenders

$

$

$

$

42.00

20.00

4.20

24.20

17.80

$20,000

15,000

Mixers

$ 26.00

$ 15.00

2.60

$ 17.60

$ 8.40

$12,000

28,000

WestBlenders

$

$

$

$

38.00

20.00

3.80

23.80

14.20

$15,000

15,000

Mixers

$ 24.00

$ 15.00

2.40

$ 17.40

$ 6.60

$10,000

44,000

Blenders Mixers East WestUnal-

located

ControllableDirect Man-ufacturingCosts

TerritorialFixed Costs(joint toproducts)

Joint FixedManufactur-ing Costs

CorporateHeadquar-ters Costs

$200,000 $100,000

$50,000 $30,000

$100,000

$250,000

^ Programmed advertising costs are fixed costs that are reviewedeach year through the budget process. (Therefore, they are not ina direct relationship with sales revenue or units sold. This could re-sult from having a particular ad aimed at only one channel memberor group of channel members. An example would be a trade maga-zine ad in a conference program for a Wholesalers Convention.Such an ad would not reach the retailer.)

territory, channel, and order size. (The modulardata base could just as easily have provided forprimary segmentation by territory or channel, orwhatever.) The exhibits which follow show the pos-sible modular income statements that can be con-structed.

Exhibit 2 shows the hierarchy and linkagesamong the segmental contribution margin incomestatements illustrated here.

Exhibit 4Budgeted Channei

WholesalerSmallOrder

East:

Blenders:

of Distribution Costs

Channel 1LargeOrder

Large Retailer ChannelSmall' LargeOrder Order

BudgetedSales (units) 5,119

Cost PerUnit $3.00

Total $15,357

4,868 2,381 2,632

$2.40 $3.50 $2.80$11,683 $ 8,334 $ 7,370

Mixers:


Cost PerUnit $2.00

Total $20,000

8,000 3,000 7,000

$1.40 $2.50 $1.80$11,200 $ 7,500 $12,600

West:

Blenders:


Cost PerUnit $4.00

Total $11,524

3,132 4,619 4,368

$3.20 $2.90 $2.20$10,022 $13,395 $ 9,610

Mixers:


Cost PerUnit $3.10

Total $27,900

8,000 14,000 13,000

$2.50 $1.80 $1.20$20,000 $25,200 $15,600

Basic data for the illustration is shown inExhibit 3, the Master Cost Data Sheet. Unit salesand channel of distribution costs are broken downby territory, product, and channel in Exhibit 4.

Income for the entire firm is shown in Exhibit5. It is the only statement containing $430,000 ofcosts (territory costs, joint manufacturing costs, andcorporate headquarters costs) which are joint to theproduct oriented segmental income statementsshown in Exhibits 6-19.

Clues for ActionThe loss at the corporate level (as shown in Exhibit5), indicates that the firm should either strengthen,if possible, those segments which are weakestand/or reallocate more of its resources to those seg-ments which are strongest.


In Exhibits 6 and 13, Total Income Statementsfor blenders and mixers, blenders are stronger thanmixers in terms of Contribution Margin (32.7% ver-sus 21.6%) although slightly less profitable aftertaking into account direct fixed costs (13.1% versus14.8%). This may indicate that not enough pro-grammed advertising costs are being budgeted toblenders. More advertising effort may be needed toeffectively exploit higher Contribution Margin ofblenders.

At the same time, the further breakdowns in-dicate that the Segment Income of the West Terri-tory is lagging behind the East Territory for bothblenders and mixers (see Exhibits 7, 10, 14, and 17).The biggest reason for this poor performance is thevery low Segment Income of the Wholesaler Chan-nels in the West Territory (Exhibits 11 and 18).

Action to improve the situation is especiallycalled for in the Wholesaler Channel for blenders inthe West Territory. Not only is the Segment Incomepercentage (6.5%) the lowest for any segment in thewhole analysis, but the corresponding Contribu-tion Margin is relatively strong (27.9%). The prob-lem is one of spreading heavy fixed costs of man-ufacturing over more sales. The solution, again,would be to take advantage of the good contribu-tion margin percentage through increased advertis-ing effort or, perhaps in this case, by expanding thesales force.

As another indication of the revealing capabil-ity of this kind of analysis, consider the profitabilityof the two channels. If they had simply been com-pared in total (as a form of primary segmentation),the figures would have been:

ChannelContribution

Margin %Segment

%Income

$

WholesalerLarge Retailer

26.3%27.8%

12.9%14.3%

$212,588$208,807

The two channels would have appeared to bevery even in profitability. Yet recombining in vari-ous ways brings out still more information. Exhibit20 shows that if the Wholesaler Channel in the Westcould be improved to match the Wholesaler Chan-nel in the East, the total Wholesaler Channel wouldhave outperformed the Large Retailer Channel.

Within the Large Retailer Channel, blendersand mixers in the East are relatively more profitablein terms of both Contribution Margin and SegmentIncome percentages than their counterparts in theWest. However, Segment Income in total dollars forblenders and mixers in the East ($74,209) is barelyhalf of that for the corresponding products in theWest for the Large Retailer Channel ($134,598).

Maybe the East Territory for Large Retailers needs agreater dosage of advertising dollars to exploit itsrelative advantage. Perhaps the whole Large Re-tailer Channel needs some kind of revamping—aneed that otherwise would never have been re-vealed except through segmental analysis.

Another aspect of the problem lies in ordersize. Exhibit 21 reveals that this is most evidentwithin the Large Retailer Channel in the West.Within that territory and channel, distribution costsfor small order sizes of mixers are 50% greater perdollar of revenue than for large orders. Similarly,small orders of blenders in the West in the LargeRetailer Channel are out of line relative to largeorders (31% excess). Small order costs are also out ofline relative to large orders for mixers in the East inboth channels (39.1% and 42.6% for Large Retailersand Wholesalers). Efforts must be made to increasethe size of Large Retailers' small orders, or the re-tailers responsible for these orders must be con-verted to buying from wholesalers.

Exhibit 20Aggregate Comparison of Wholesaler Channeland Large Retailer Channel

Channel

WHOLESALERS^

West

blendersmixersSubtotal

East


LARGERETAILERS"

West


East


^Exhibits 8, 11, 15,Exhibits 9, 12, 16,

^ Aggregate totals.

Contribu-tion Mar-gin {%)

[26.3%]"^

27.9%15.8%

35.9%25.6%

[27.8%]'^

30.6%21.2%

34.9%24.6%

and 18.and 19.

Segment%

112.9%)'^

6.5%8.5%

18.2%18.6%

[14.3%]'=

11.3%14.8%

13.4%17.7%

Income$

$14,751$34,689

$76,148$87,000

$38,698$95,900

$28,198$46.011

Total

($212,5881^

$ 49,440

$163,148

[$208,8071 '^

$134,598

$ 74,209


EXHIBITS 5 and 6-12Total Income Statements

Exhibit 7Blenders — East Territory

Revenues (15,000 units)

Variable Costs:Manufacturing Marketing:

SellingChannel Costs

Total

Contribution Margin

Fixed Costs:

Programmed AdvertisingDirect (to product) Manu-

facturing Costs

Total

Segment Income

$630,000

$300,00063,000 10.0%42,744 6.8%

$405,744$224,256 35.6%

$ 20,000 3.2%

100,000

$120,000

$104,256 16.5%

Revenues

Variable Costs:Manufacturing

Marketing:SellingChannel Costs

Total

ContributionMargin

Fixed Costs:Programmed

Advertising'Direct (to prod-

uct) Manufac-turing Costs^

Total

Segment Income

Exhibit 8Wholesaler Channel

SmallOrder

(5119 units

$214,998

$102,38021,50015,357

$139,237

$ 75,761

$ 4,100

34,127

$ 38,227

$ 37,534

10.0%7.1%

35.2%

1.9%

(17.5%

LargeOrder

4868 units)

$204,456

$ 97,36020,44611,683

$129,489

$ 74,967

$ 3,900

32,453

$ 36,353

$ 38,614

10.0%5.7%

36.7%

1.9%

18.9%

Total

$419,454

$199,74041,94627,040

$268,726

$150,728

$ 8,000

66,580$ 74,580

$ 76,148

10.0%6.4%

35.9%

1.9%

18.2%

Revenues



Total

ContributionMargin


Advertising'Direct (to prod-

uct) Manufac-turing Costs'

Total

Segment Income

Large

Exhibit 9Retailer Channel

SmallOrder

(2381 units)

$100,002

$ 47,62010,0008,334

$ 65,954

$ 34,048

$ 5,700

15,783

$ 21,483

$ 12,565

10.0%8.3%

34.0%

5.7%

12.6%

LargeOrder

2632 units)

$110,544

$

$

$

$

$

$

52,64011,0547,370

71,064

39,480

6,300

17,547

23,847

15,633

10.0%6.7%

35.7%

5.7%

14.1%

Total

$210,546

$100,26021,05415,704

$137,018

$ 73,528

$ 12,000

33,330$ 45,330

$ 28,198

10.0%7.5%

34.9%

5.7%

13.4%

' Direct to the Large Retailer Channel and allocated in accordance with reve-nues. The same procedure Is used for channel analysis in later exhibits.

^ Allocated in proportion of number of units sold in each order size for thischannel to total sales. The same procedure Is used In later exhibits.


Exhibit 5Corporate Level, 1977

Revenues



Total

Contribution Margin

Fixed Costs:Programnned AdvertisingDirect (to product) Manu-

facturing CostsTerritory CostsJoint Manufacturing CostsCorporata Headquarters Costs

Total

Net Loss

$2,984,000

$1,680,000298,400 10.0%'227,295 7.6%

$2,205,695

S 778,305 26.1%

$ 57,000 1.9%

300,00080,000

100,000250,000

$ 787,000

($8,6951 (.3%)

Percentages shown arebased upon revenues. I

Exhibit 6Blenders (Both Territories)




Total

Contribution MarginFixed Costs:

Programmed AdvertisingDirect (to product) Manu-

facturing Costs

Total

Segment Income

$1,200,000

$ 600,000120,000 10.0%87,295 7.3%

$ 807,295

$ 392,705 32.7%

$ 35,000 2.9%

200,000

$ 235,000

$ 157,705 13.1%

Exhibit 10Blenders — West Territory




Total

Contribution MarginFixed Costs:

Programmed AdvertisingDirect (to product) Manufac-

turing Costs

Total

Segment Income

$570,000

$300,00057,00044,551

$401,551

$168,449

$ 15,000

100,000

$115,000

$ 53,449

10.0%7.8%

29.6%

2.6%

9.4%

1J

Revenues

Variable Costs:(Vlanufacturing


Total

ContributionMargin


AdvertisingDirect (to prod-

uct) Manufac-turing Costs

Total

Segment Income

Exhibit 11Wholesaler Channel

SmallOrder

(2881 units

$109,478

$

$

$

$

$

$

57,62010,94811,524

80,092

29,386

4,312

19,207

23,519

5,867

10.0%10.5%

268%

3.9%

5.4%

LargeOrder

(3132 units

$119,016

$ 62,64011,90210,022

$ 84,564

$ 34,452

$ 4,688

20,880

$ 25,568

$.. 8,884

10.0%8.4%

28.9%

3.9%

7 5 %

Total

$228,494

$120,26022,85021,546

$164,656

$ 63,838

$ 9,000

40,087

$ 19,087

$ 14,751

10.0%9.4%

27.9%

3.9%

6.5%

IRevenues



Total

ContributionMargin




Total

Segment Income

Large

Exhibit 12Retailer Channel

SmallOrder

(4619 units!

$175,522

$ 92,38017,55;'13,395

$123,327

$ 52,195

$ 3,084

30,793

$ 33,877

$ 18,318

10.0%7.6%

29.7%

1.8%

10.4%

LargeOrder

(4368unitsl

$165,984

$ 87,36016,5989,610

$113,568

$ 52,416

$ 2,916

29,120

$ 32,036

$ 20,380

10.0%5.8%

31.6%

1.8%

12.3%

Total

$341,506

$179,74034,15023,005

$236,895

$104,611

$ 6,000

59,913

$ 65,913

$ 38,698

10.0%6.7%

30.6%

1.8%

11.3%


Exhibit 5Corporate Level,

Revenues



Total

Contribution Margin

Fixed Costs:

Programmed AdvertisingDirect (to product! Manu-

facturing CostsTerritory CostsJoint Manufacturing CostsCorporate Headquarters Costs

Total

Net Loss

1977

$2,984,000

$1,680,000

298,400227,295

$2,205,695

$ 778,305

$ 57,000

300,00080,000

100,000250,000

$ 787,000

($8,695)

10.0%'7.6%

26.1%

1.9%

(.3%!

Exhibit 14Mixers - East Territory

Revenues (28,000 units!



Total

Contribution Margin

Fixed Costs:Programmed AdvertisingDirect (to product! Manufac-

turing Costs

Total

Segment Income

$728,000

$420,00072,800 10.0%51,300 7.0%

$544,100

$183,900 25.3%

$ 12,000 1.6%

38,889$ 50,889

$133,011 18.3%

Exhibit 13Mixers (Both Territories)

Revenues (72,000 units!



Total

Contribution Margin

Fixed Costs:Programmed AdvertisingDirect (to product! Manufac-

turing Costs

Total

Segment Income

$1,784,000

$1,080,000178,400 10.0%140,000 7.8%

$1,398,400

$ 385,600 21.6%

$ 22,000 1.2%

100,000

$ 122,000

$ 263,600 14.8%

L

RevenuesVariable Costs:

ManufacturingMarketing:


Total

ContributionMargin




Total

Segment Income

Exhibft 15

Wholesaler Channel

SmallOrder

10.000 units!

$260,000

$160,00026,000 10.0%20,000 7.7%

$196,000

$ 64,000 24.6%

$ 4,445 1.7%

13,889$ 18,334

$ 45,666 17.6%

LargeOrder

8,000 units

$208,000

$120,00020,80011,200

$152,000

$ 56,000

$ 3,555

11,111$ 14,666

$ 41,334

10.0%5.4%

26.9%

1.7%

19.8%

Total

$468,000

$270,00046,80031,200

$348,000

$120,000

$ 8,000

25,000

$ 33,000

$ 87,000

10.0%6.7%

25.6%

1.7%

18.6%

RevenuesVariable Costs:

ManufacturingMarketing:


Total

ContributionMargin



uct! Manufac-turing Costs

Total

Segment Income

Large

1Exhibit 16Retailer Channel

SmallOrder

3,000 units!

$78,000

$45,0007,8007,500

$60,300

$17,700

$ 1,200

4,167

$ 6,367

$12,333

10.0%9.6%

22.7%

1.5%

15.8%

LargeOrder

7,000 units!

$182,000

$105,00018,20012,600

$135,800

$ 46,200

$ 2,800

9,722

$ 12,622

$ 33,678

10.0%6.9%

25.4%

1.5%

18.5%

Total

$260,000

$150,00026,10020,100

$196,100

$ 63,900

$ 4,000

13,889

$ 17,889

$ 46,011

10.0%7.7%

24.6%

1.5%

17.7%


EXHIBITS 5 and 13-19Total Income Statements

Exhibit 17Mixers — West Territory

Revenues

Variable Costs:

Manufacturing Marketing:SellingChannel Costs

Total

Contribution Margin

Fixed Costs:Programmed AdvertisingDirect (to product) Manufac-

turing Costs

Total

Segment Income

$1,056,000

660,000105,600 10.0%88,700 8.4%

$ 854,300

$ 201,700 19.1%

$ 10,000 .9%

61.111

$ 71,111

$ 130,689 12.4%

Revenues



Total

ContributionMargin




Total

Segment Income

Exhibit 18Wholesale Channel

SmallOrder

(9000 units

$216,000

$135,00021,60027,900

$184,600

$ 31,500

$ 3.176

12,500

$ 15,676

$ 15,824

10.0%12.9%

14.6%

1.5%

7.3%

LargeOrder

(8000 units

$192,000

$120,00029,20020,000

$159,200

$ 32,800

$ 2,824

11,111

$ 13,935

$ 18,865

10.0%10.4%

17.1%

1.5%

9.8%

Total

$408,000

$255,00040,80047,900

$343,700

$ 64,300

$ 6,000

23,611

$ 29,611

$ 34,689

10.0%11.7%

15.8%

1.5%

8.5%

Exhibit 19Large Retailer Channel

SmallOrder

(14,000 units!

Revenues



Total

ContributionMargin




Total

Segment Income

LargeOrder

(13,000 units!

$336,000

$210,000

33,600 10.0%25,200 7.5%

$268,800

$ 67,200 20.0%

$ 2,074 .6%

19,444

$ 21,618

$ 45,682 13.6%

$312,000

$195,000

31,200 10.0%15.600 5.0%

$241,800

$ 70,200 22.5%

$ 1,926

18,056

.6%

$ 19,982

$ 50,218 16.1%

Total

$648,000

$405,000

64,800 10.0%40.800 6.3%

$510,600

$137,400 21.2%

$ 4,000 .6%

37,500

$ 41,500

$ 96,900 14.8%


Exhibit 21Relative Distribution Costs by Order Size

Territory Product

LARGE RETAILERS

LargeOrder'

SmallOrder'

RelativeCost

Excess^

WestWestEastEast

Territory

BlendersMixersBlendersMixers

Product

5.8%5.0%6.7%6.9%

LargeOrder^

7.6%7.5%8.3%9.6%

SmallOrder^

31.0%50.0%23.9%39.1%

RelativeCost

Excess^

WHOLESALERS

WestWestEastEast

BlendersMixersBlendersMixers

8.4%10.4%

5.7%5.4%

10.5%12.9%

7.1%1.1%

25%24%24.6%42.6%

' Channel costs as a percentage of revenues from Exhibits 9, 12,16, 19.' Percentage is based on large order size; for example, 7.6% - 5.8%= 1.8% and 1 ^ = 3 1 % .^ Channel costs as a percentage of revenues from Exhibits 8, 11,15, 18.

Benefits of SegmentationThese are just a few of the possible areas where theuse of the modular contribution margin incomestatement could improve management control andplanning, for the sake of greater profitability. Inaddition, actual results can be compared against theprojected budget for each segment to analyze man-agement's performance or the effect of uncontrolla-ble factors on that performance.

If segmental analysis had not been done at all,or if the segmentation had been conducted just by

product (or just by territory, just by channel, or justbo order size) many ideas for corrective action orexpanded effort might not have been generated.

While the benefits of segmental statementsmust exceed costs of preparation, the power of thecomputer should lessen costs enough to make seg-mental analysis beneficial to an increasing numberof companies.

ENDNOTES1. For example, "Report of the Committee on Cost andProfitability Analyses for Marketing," The Accotinting Re-view Supplement (1972), pp. 575-615; W. J. E. Crissy, PaulFischer, and Frank H. Mossman, "Segmental Analysis:Key to Marketing Profitability," Business Topics (Spring1973), pp. 42-49; V. H, Kirpalani and Stanley J. Shapiro,"Financial Dimensions of Marketing Management,"Journal of Marketing, Vol. 37 No. 3 (July 1973), pp. 40-47;Leiand L. Beik and Stephen L. Buzby, "ProfitabilityAnalysis by Market Segments," Journal of Marketing,Vol. 37 No, 3 (July 1973), pp, 48-53; Frank H. Mossman,Paul Fischer and VV, J, E. Crissy, "New Approaches toAnalyzing Marketing Profitability," Journal of Market-ing, Vol. 38 No. 2 (April 1974), pp, 43-48; Merritt J.Davoust, "Analyzing a Client's Customer ProfitabilityPicture," Management Adviser, May-June 1974, pp, 15-19;Harry I. Wolk and Patrick M. Dunne, "Modularized Con-tribution Margin Income Statements for Marketing andPhysical Distribution Analysis," Research Issues in Logis-tics, James F, Robeson and John Grabner, eds,, (Colum-bus: The Ohio State University, 1975), pp. 199-210;Stephen L. Buzby and Lester E. Heitger, "Profit OrientedReporting for Marketing Decision Makers," Business Top-ics, Summer 1976, pp. 60-68; Richard L. Lewis and Leo G.Erickson, "Distribution System Costing: An Overview,"Distribution System Costing: Concepts and Procedures, JohnR. Grabner and William S. Sargent, eds. (Columbus: TheOhio State University, 1972), pp. 1-30.

2. Sophisticated methods for separating fixed and vari-able costs are shown in William J. Baumol and Charles H.Sevin, "Marketing Costs and Mathematical Program-ming," New Decision-Making Tools for Managers, EdwardC. Bursk and John F. Chapman, eds. (New York: NewAmerican Library, Inc., 1963), pp. 247-65; and R. S.Gynther, "Improving Separation of Fixed and VariableExpenses," Management Accounting, June 1963, pp. 29-38.3. Mossman, same as reference 1, pg 44.

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