In order to do a financial analysis, marketers must calculate the estimated profit.

Estimated profit is the expected sales minus the fixed and variable costs.

The formulas for calculating profit are:

Sales = number of units X the price per unit

Variable costs = number of units X the variable cost per unit

Profit = sales fixed costs variable costs

Marketers often calculate the profit margin to help them decide between alternatives. Profit margin is the percentage of profit in relation to sales. The formula for profit margin is:

Profit Margin % = Net profit estimated sales X 100

For the Ariadne brand the company wants to achieve a profit margin of 33%.

Ariadne

Original Estimate

Ariadne

Revised Estimate 2

Ariadne

Revised Estimate 3

Estimated Total Annual

Sales Volume (cases)

120,000

120,000

125,000

Estimated Selling Price per case ($)

28.00

60,000 cases @ $29.88;

60,000 cases

@ $28.39

62,500 cases @ $29.88;

62,500 cases

@ $28.39

Total Fixed Costs ($)

750,000

750,000

750,000

Average Variable Cost per case excluding

communications ($)

7.50

7.50

7.50

Average Variable Cost per case

communications ($)

5.00

5.00

6.00

Total Average Variable

Cost per case ($)

12.50

12.50

$13.50

Record your revised profit and loss estimate for Ariadne B in the following chart:

Ariadne Original

Estimate

Ariadne Revised

Estimate 2

Ariadne Revised

Estimate 3

Sales Revenue ($)

3,360,000

3,496,200

Total Fixed Costs ($)

750,000

750,000

Total Variable Costs ($)

1,500,000

1,500,000

Net Profit ($)

1,110,000

1,246,200

Profit Margin (%)

33.0

35.6

2. Based on the above financial estimates, should support spending on communications for Ariadne be set at $5.00 per case or $6.00 per case?

3. Given your answer to the above question, what absolute level of marketing communications spending will the brands communication campaign be based on?