Question

Marketing Strategy

There are 3 key measures to watch when analyzing the income statement: gross margin percent, expense ratio, and return on sales. Since each of these measures is a percent of revenue, they can be compared over time to identify problems and improvements in margins, or they can be used to check the efficiency of a firm’s marketing.

Here are the calculations:

Create a spreadsheet showing the income statement for a company that had the following results last period.

Item

Units Sold

Unit Cost

Price

Advertising

Consumer Promotion

Personal Selling

Dealer Promotion

Product Development

Value

100,000

$40

$90

$1,500,000

$1,800,000

5 salespeople @ $80k each

$1,200,000

$700,000

1. What is the gross margin percent for the period?

2. What is the expense ratio?

3. What is the return on sales?

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Student or Team Name:

4. Recalculate each of the measures for unit costs of $35 and $45.

5. Using $40 for unit cost, what is the effect of adding 2 salespeople, if sales increase by 5,000 units?

Answer 1

	Income Statement		Unit Cost
			$40
	Sales ( 100000*90)		$9,000,000
	Less Product Cost ($40 *100000)	$4,000,000
	Gross Margin		$5,000,000
	Less Operating Expenses
	Advertising	$1,500,000
	Consumer Promotion	$1,800,000
	Personal Selling
	(80000*5)	$400,000
	Dealer Promotion	$1,200,000
	Product Development	$700,000
	Operating Exp		$5,600,000
	Net Income		($600,000)
1	Gross Margin % = Gross Margin / Sales * 100
		$5000000 / $9000000 *100
		56%
2	Expense Ration = Operating Exp / Sale *100
		$5600000 / $9000000*100
		62.22%
3	Return on sales = Income (loss) / sales * 100
		(600000 )/ 9000000*100
		-6.67%
4	Income Statment		Unit Cost
			$35
	Sales ( 100000*90)		$9,000,000
	Less Product Cost ($35 *100000)	$3,500,000
	Gross Margin		$5,500,000
	Less Operating Expenses
	Advertising	$1,500,000
	Consumer Promotion	$1,800,000
	Personal Selling
	(80000*5)	$400,000
	Dealer Promotion	$1,200,000
	Product Development	$700,000
	Operating Exp		$5,600,000
	Net Income		($100,000)
	Gross Margin % = Gross Margin / Sales * 100
		$5500000 / $9000000 *100
		61.11%
	Expense Ration = Operating Exp / Sale *100
		$5600000 / $9000000*100
		62.22%
	Return on sales = Income (loss) / sales * 100
		(100000 )/ 9000000*100
		-1.11%
	Income Statement
			Unit Cost
			$45
	Sales ( 100000*90)		$9,000,000
	Less Product Cost ($45 *100000)	$4,500,000
	Gross Margin		$4,500,000
	Less Operating Expenses
	Advertising	$1,500,000
	Consumer Promotion	$1,800,000
	Personal Selling
	(80000*5)	$400,000
	Dealer Promotion	$1,200,000
	Product Development	$700,000
	Operating Exp		$5,600,000
	Net Income		($1,100,000)
	Gross Margin % = Gross Margin / Sales * 100
		$4500000 / $9000000 *100
		50.00%
	Expense Ration = Operating Exp / Sale *100
		$5600000 / $9000000*100
		62.22%
	Return on sales = Income (loss) / sales * 100
		(1100000)/ 9000000*100
		-12.22%
5
	Income Statement		Unit Cost
			$40
	Sales ( 105000*90)		$9,450,000
	Less Product Cost ($40 *105000)	$4,200,000
	Gross Margin		$5,250,000
	Less Operating Expenses
	Advertising	$1,500,000
	Consumer Promotion	$1,800,000
	Personal Selling
	(80000*7)	$560,000
	Dealer Promotion	$1,200,000
	Product Development	$700,000
	Operating Exp		$5,760,000
	Net Income		($510,000)
	Gross Margin % = Gross Margin / Sales * 100
		$5250000 / $9450000 *100
		55.56%
	Expense Ration = Operating Exp / Sale *100
		$5760000 / $9450000*100
		60.95%
	Return on sales = Income (loss) / sales * 100
		(510000 )/ 9450000*100
		-5.40%