Sample Problems for the Second 316 Midterm Based on New Text of Fall 09 Ted Mitchell

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1 Sample Problems for the Second 316 Midterm Based on New Text of Fall 09 Ted Mitchell The goal in this course is to learn skills that will allow a student to monitor a firm s marketing performance, diagnose problems, and make changes to the firm s strategy. By the second midterm all marketing students should be able to solve all the following problems. 1. Your company builds shoes for a cost of $40 per pair and you sell them for a price that earns you an 80% markup on price. What price did you sell the shoes for? a) $232 b) $72 c) $200 * d) $120 e) $220 Answer: P-V = M p P P- 40 =.8P P-.8P = 40.2P = 40 P = 40/.2 = A store is setting its price with a 115% markup on cost. What is the markup based on selling price? a) 60% b) 50% c) 53.5% * d) 25.5% e) 210% Answer: 1/Mp 1/Mv = 1 1/Mp = 1+1/Mv 1/Mp = 1 + 1/1.15 Mp = 1/(1+1/1.15) = 53.49% Or Mv/(1+Mv) = 1.15/(1+1.15) =53.49% 3. There are 10 companies competing in the Shoe industry. The average expenditure on all forms of promotion for each firm is $3 million. Your firm is spending $4 million. Your firm is charging an average price for an average quality shoe and you have an average customer satisfaction rating. According to the fundamental theorem of marketshare determination, what market share should you have? a) 25% b) 10% c) 13.3% * d) 75% e) 33.3 % 1

2 Answer: Assume in general Market Share = Firm s effort)/ industries effort Assume in this case Market Share = Share of Voice Market Share = $4/(10x$3) = $4/$30 = 13.33% 4. The manufacturing and sale of 1,100 wooden shoes results in the following costs: Average cost of direct materials = $7 per unit Average advertising cost = $4 per unit Average sales commission = $2 per unit Average storage cost = $3 per unit What are the total fixed costs and the variable costs per unit? a) fixed = $0, variable cost $17 per unit b) fixed $77000, variable cost $7 per unit c) fixed $7700, variable cost $9 per unit * d) fixed $3,600, variable cost $14 per unit Answer: Students must know the difference between fixed and variable marketing costs Fixed = total advertising + total storage = 4(1100) + 3(1100) = 7,700 Variable = commission + material = 2 + 7=9 Best wrong answer: F = 7700, V = = Your boss is reviewing last year s sales performance. The revenue in period 3 was $4,000 and the revenue in period 4 was $2,640. The $1,360 gap in sales performance must be explained. You had authorized a price increase from the $2.00 price in period 3 to a higher price of $2.40 per unit in period 4. What was the dollar impact due to the price increase on the change in sales revenue? a) -$440 b) $800 c) $440 * d) $1,800 e) $1,360 Answer: Revenue = R =PQ Units sold in period 4 = Q4 = R4/P4 =$2640/$2.4 = 1100 units Units sold in period 3 = Q3 = R3/P3 = $4,000/$2.0 = 2000 units Revenue Variance = Revenue in period 4 Revenue in period 3 and Revenue Variance = price variance + quantity variance + any joint variance R4 R3 = P4Q4 P3Q3 = $2640 $4000 = -$1,360 R4 R3 = Qmin(P4-P3) + Pmin(Q4-Q3) remember to use the minimum values R4 R3 = 1100($2.4-$2) + $2( ) = -$1360 $440 + ( 1800) = -$1360 impact on revenue change due the change in price (variance) = $440 2

3 6. You have a current market share of 25% and the total size of the market is 9,000 units. Last period you had a market share of 20% and the total size of the market was 10,000 units sold. Your sales volume increased by 250 units from the last period to the current period. What impact, measured in number of units sold, did the shrinkage in the total market have on your sales volume? a) 200 units * b) 450 units c) 250 units d) 250 units e) 450 units The best answer is The decline in the market resulted in a decrease of 200 units in the firm s sales Calculated as Firm s Current Volume = 25% (9000) = 2,250 units Firm s Last Period Volume = 20% (10,000) = 2,000 units Size for the change in the firm s sales 2, = 250 units Size of total market change = 9,000 10,000 = -1,000 units Impact on Sales due to change in total market = 20% (9,000 10,000) = -200 units * Impact on Sales due to change in market share = 9,000 (25% 20%) = 450 units Net Change in sales = 250 units The manager s efforts in the improved market share gained a total of 450 units (a nice bonus for her efforts) The decline in the market is beyond her control. 7. A firm has reported its revenues as $160,000, its contribution or gross profit margin as $80,000, its assets as $105,000, its asset turn over ratio as 45%, and its net profit as $13,000. What is its net profit margin (i.e., return on sales)? a) Net Profit margin = 6%, b) Net Profit margin = 9.3%, c) Net Profit margin = %, * d) Net Profit Margin = 42%. Answer: Profit margin = 13,000/160,000 = = 8.125% ROI = 13,000/105,000 = 12.38% 8. Students have to know the difference between economies of scale and the learning curve. Cost declines indicated by the learning (i.e., experience) curve are due to: a) More efficient labor utilization. b) Improved material flow. c) Spreading of fixed costs over more units. d) All of the above. e) Only a and b above. * 3

4 9. The four P s of marketing management are the classic classifications for the marketing variables that marketing managers can manipulate in the marketing plan. Which are the four P s of marketing management. a) Price, promotion, place, power b) Price, promotion, place, profit c) Profit, place, promotion, packaging d) Price, place, product, promotion * e) Profit, promotion, packaging, price 10. Marketing is not just advertising. If you have a monopoly and wish to maximize profits, then there is no need to do any marketing. a) True b) False * Students would be amazed to know how many people believe this because they have no idea what marketing involves. 11. The amount of money that is left as a contribution to general manufacturing overheads and administrative operating expenses after all the Marketing expenses have been subtracted from the total contribution or gross profit is the net marketing contribution. a) True * b) False Net marketing contribution is sometimes called the profit after promotion. Someday accountants will provide it as a part of the basic operating statement. 12. Marketing management is often perceived as demand management because the levels of demand or customer purchasing response for brands can be twisted and shifted by manipulating elements of the marketing mix. a) True* b) False Totally new products and means of distribution can totally change the way customers define the market place. An increase in promotion will shift the classic demand curve based on price alone. 14. A key ratio that accountants watch to make sure a company is not overspending on promotion expenses to achieve its sales goals is its: a) gross profit margin b) asset turnover c) return on net worth d) promotion expense-to-sales ratio* Unfortunately some firms use the accounting ratios such as the advertising to sales ratio to set advertising budgets. Such firms encourage the stupidity of lowering the advertising budget when the sales volume drops, when the correct strategy is to increase advertising. Never forget there are many accountants who think of advertising as a cost driver and do not realize that advertising is a sales driver. 4

5 15. The Return on Sales or Net Profit Margin is a financial ratio that is calculated by dividing net income or net profit after taxes by net sales revenue. a) True * b) False This ratio is crucial in many price setting formulae. 16. You have marked down the original price of your inventory by 25% a month ago. You marked it down by an additional 17% two weeks ago. Yesterday you marked it up by 12%. What is the current price if the original price was $10? a) $12.87 b) $6.80 c) $6.48 d) $7.75 e) $6.97* The best answer is (1-0.25) x (1-0.17) x (1+0.12) = 0.75 x 0.83 x 1.12 = The current price is x10 = $6.97 Every student must appreciate the importance of markup on price and understand why managers hardly ever use markup on coat. 17. A firm has reported its revenues as $160,000, its contribution or gross profit as $80,000, its assets as $105,000, its asset turn over ratio as 45%, and its net profit as $13,000. What is its net profit margin (i.e., return on sales) and return on assets? a) Net Profit margin = 6%, ROI = 12% b) Net Profit margin = 9.3%, ROI =13.3% c) Net Profit margin = %, ROI = 12.38%* d) Net Profit Margin = 42%. ROI = 150% Modern marketing managers often use the idea of return on investment in very general way. They think of every marketing effort as an investment. However, the term means something very specific to finance managers and accountants. Accountants do NOT think of advertising as an investment. 18. A firm has a relative market share of 90% and a relative marketing effort of 120% in period 4. What is its efficiency at converting marketing effort into marketing share? Answer Market share theorem tells us Relative share = efficiency of effort x marketing relative effort Sr = k(mer) 90% = k(120%) k= 90/120 = A firm has a relative market share of 90%, a relative marketing effort of 120% and an efficiency rating of 75% in period 4. In period 5 the efficiency of the firm in converting relative marketing effort had improved to 80%. Its relative marketing effort had decreased to 110% of average and its relative market share had decreased to 88%. The 5

6 drop of 2% in relative market share is significant. What impact did the change in the firm s efficiency have on the 2% change in the firm s relative market share. answer Period 4 Period 5 change impact Relative effort 120% 110% -10% 0.75(-10%)= -7.5% Efficiency 75% 80% 5% 1.10(5%) = 5.5% Joint impact Relative market Share 90% 88% -2% -2% The change in efficiency increased the relative market share by 5.5% but this was over whelmed by the 7.5% decrease due to the drop in relative effort. Mini-case Questions The following information has been collected on decisions and performance in one market of the new shoes game. By the second midterm a student in Mkt 316 should feel comfortable converting the basic input and output variables into a classic operating statement of the firm s performance in a market and converting the basic competitive information into a statement of the firm s performance relative to the competition and changes in the competitive environment. Input and Output Variables period 4 period 5 Price Variable Cost Advertising Cons Promo Sales Force Dealer Promo Market Research Share of Prod Dev Expense Version Reached 2 3 Sales Volume Q Competitive Information Number of firms Size of Market Average Share % 10.0% 10.0% Avg Price Avg Adv Avg Cons Promo Avg Sales Force Avg Dealer Promotion Avg Total Promo Basic Statement of the Firm s Income and Operating Performance in a Market 6

7 Sales Volume Q Change in Sales Volume Q Sales Revenue R $8,550,000 $9,100,000 Change in Revenue R CoGS Dollar markup %Markup 72.63% 76.92% Gross Profit Gross Total Promotion Change in Total Promotion Promotion per Unit sold Net Marketing Contribution $3,610,000 $3,440,000 MROS 42.22% 43.52% R&D Breakeven Price BEP Net Profit %ROS 36.14% 37.80% Profit per Unit Basic Statement of Performance Relative to the Competition Number of firms Size of Market % Market Size 6.67% Average Share % 10% 10% Market Share (units)% 12% 12.5% Avg Price Relative Price % 95.97% Avg Adv Avg Cons Promo Avg Sales Force Avg Dealer Promotion Avg Total Promo Share of Voice% 8.67% 95.97% Avg Product Version Share of Product Quality 8.00% 11.11% Share Voice Conversion Efficiency % % Share Quality Conversion Efficiency % % Every student in Mkt 316 should be able to calculate, explain and use all the ratios and other metrics shown in the two performance statements shown above. The ratios of change and efficiency are particularly important for making a diagnosis of what the problems are and how to change the marketing strategy to fix them or avoid them. For example, the growth or decline in a market is outside the control of the marketing manager. However a manager must be able to calculate the impact of market changes on 7

8 the firm s sales. A manager should not take the credit or the blame for things outside the manager s control. A sample problem from the first midterm: In the above performance tables there has been a change of 10,000 in the number of shoes the firm has sold from period 4 to period 5. What was the impact on the change in the units sold due strictly to the growth of the market? Answer: 6,000 units of the firm s sales growth was due strictly to the growth of the market. Calculations involve Change in sales volume = Quantity in 5 Quantity in 4 = 100,000-90,000 = 10,000 Change in market share = Share 5 - Share 4 = 12.5% 12% = 0.5% Change in market size = Size in 5 - Size in 4 =800, ,000 = 50,000 Resulting in the diagnostic that the Impact on firm s sales volume due to growth of market = 12% (50,000) = 6,000 units 8