Name: 

A company’s Accounting Department prepares the official annual profit and loss statements for each of the firm’s brand offerings.  However, marketing managers prepare their own simple versions of annual profit and loss statements to do initial estimates of the impact that a new marketing plan will have on their brand’s profitability, or to help determine whether to alter the brand’s product formula or some other component of its marketing mix.

Profit and Loss Statement Components

A profit and loss statement has five basic components:

Sales revenue is the money generated or expected to be generated for the company by sales of the brand. You worked with the formula for calculating sales revenue in the Chapter 7 Marketing Math Questions.  It is:

      Brand size estimate for one year (in terms of number of cases or units)
x   Price charged to the customer for the product (for the case or unit)
=    Sales revenue for the year

Fixed costs are costs that do not vary with differences in the amount of product sold or produced.  They are not related to anticipated brand volume and remain the same whether production output is high or low. Examples of fixed costs include executive compensation, depreciation, and insurance.  Generally, an estimate of total fixed costs for a brand is provided to the brand’s marketing manager by the company accountants and is accepted as is.  Marketers typically have no means to adjust the total fixed costs the company assigns to their brand as they work through different profit and loss scenarios.

Variable costs are costs that change when the level of production is altered.  Total variable costs are related very strongly to brand demand and sales, and will be higher when production is high and lower when production is low. Examples of variable costs include raw materials and the wages paid to plant workers.  Generally, accountants provide marketers with estimates of total average variable costs, or perhaps average variable costs by cost component, to work with in their profit and loss scenarios. Total variable costs are then calculated by multiplying the brand’s total average variable costs by the brand size estimate associated with each profit and loss scenario:

      Brand size estimate for one year (in terms of number of cases or units)
X   Total average variable costs for the brand
=    Total variable costs for the year 

Net profit is the portion of sales revenue left over after costs and expenses have been deducted from sales revenue. You worked with the formula for calculating net profit in the Chapter 7 Marketing Math Questions. It is:

      Brand sales revenue in dollars for one year
–    All of the costs and expenses of doing business
=    Net profit dollars for one year

Finally, profit margin is the percentage of sales revenue that the net profit represents.  The higher a brand’s profit margin, the more it earns for every case sold. Therefore, many companies consider profit margin to be a more important measure of profitability than net profit.  You worked with the formula for calculating profit margin in the Chapter 7 Marketing Math Questions. It is:

      Net profit dollars for one year
¸    Sales revenue for the same year
=    Profit margin (net profit as a percentage of sales)

An Example of a  Simple Profit and Loss Statement


The Impact of the Marketing Mix Components

Decisions regarding the marketing mix components (product, price, distribution, and communications) affect different parts of the profit and loss statement.  Price has the clearest and most direct impact since it affects the sales revenue (or top line) of the profit and loss statement.  Product, distribution, and communications are “costs of doing business” and affect either the sales revenue, fixed cost, or variable cost lines, depending upon where a firm’s senior management and accountants have decided to assign their specific cost components.

Deciding Which Product Formula to Market

There are many factors that are taken into account in launching a new product or a revised version of an existing product.  Obviously, consumer needs are of paramount importance, as are competitive offerings.  Considerations such as the marketing objectives for the product are also key — is the company expecting it to be a major or leading market entry, or does it simply want it to be a solid entry with a number 3 or 4 position in the market?

Suppose that you are the marketing manager on a new product under development for launch into the skin cream market.  The working brand name for your proposed new entry is “Ariadne” and your company’s R & D department has developed three different versions of the product for your consideration.  Ariadne A matches competitive performance.  Ariadne B also matches competitive performance but has a single, important advantage versus competition (protection against U-V rays — the second most important attribute for the primarily female users of skin creams).  Ariadne C is clearly superior on several attributes, including ability to clean and soften the skin, fragrance, and ability to protect against U-V rays. Ariadne B or C are the most appealing versions from the standpoint of achieving the brand’s marketing objective of being a solid number 2 or 3 in this already saturated market, but is either one viable or attractive financially?

Using the case and financial information provided below, create simple profit and loss statements for the three versions of Ariadne to help you decide which one to continue developing and testing for launch.  Note that the volume estimates vary for each version of the product, reflecting the different demand expectations for each formula.  Also please note that, like the key competitors, this product will be sold through retail stores, not directly to consumers.  Therefore the price per case provided is what your company will charge retailers for a case (or 12 units) of the product, not the retail price that consumers will pay for each unit.

	Ariadne A	Ariadne B	Ariadne C
Estimated Total Annual Sales Volume (cases)	100,000	120,000	127,000
Estimated Price per case ($)	24.00	28.00	31.50
Total Fixed Costs ($)	750,000	750,000	750,000
Average Variable Cost per case ex. product costs ($)	7.00	7.00	7.00
Average Variable Cost per case — product costs ($)	2.75	5.50	9.00
Total Average Variable Cost per case ($)	9.75	12.50	16.00

	Ariadne A	Ariadne B	Ariadne C
Sales Revenue ($)
Total Fixed Costs ($)
Total Variable Costs ($)
Net Profit ($)
Profit Margin (%)

Which version of Ariadne do you recommend continuing to develop for launch and why?