The Costs of Marketing The costs of marketing or doing business in general fall into two categories Fixed Costs and Variable Costs This discussion is based in part on material in Chapter 15 Pricing Price Management Fixed Costs Fixed costs are costs that do not change as production increases or decreases No matter how many units are produced and sold, these costs (in total) remain about the same Fixed costs can be direct or indirect Also called programmed fixed costs, direct fixed costs are those fixed costs that can be directly attributed to the production or marketing of a specific product or service Such fixed costs are typically incurred to support a specific marketing program Typical examples of direct fixed costs include Fixed production costs supporting the manufacture of a specific product such as costs related to plant and equipment including depreciation, rent, maintenance contracts, depreciation, etc These are generally constant Equipment maintenance, however, could change with output, if additional production results in the need for more maintenance Sales force Expenses Such as salaries for managers, sales persons, and administrative staff, and general administrative costs Brand Advertising costs to advertise in various media generally are treated as fixed Total advertising costs usually vary by marketing program rather than by production and sales volume Marketing support activities such as marketing research and administration Sales promotions that are not volume sensitive such as public relations and other special promotions that support brand advertising Indirect fixed costs, often referred to as overhead or committed fixed costs, are incurred to support the overall business effort These costs cannot be traced or attributed to supporting the production or marketing of any specific product Examples of committed fixed costs include Institutional Advertising intended to bolster the image of the company as a whole Salaries of executives managers receive the same salary no matter how much product is made in a given time period Customer relations efforts not directly related to a single product Taxes many taxes, such as real estate taxes, do not change with production volume Figure 1 plots total fixed costs as a function of production output The line parallel to the output axis emphasizes that these costs remain constant with increases (or decreases) in production per time period Variable Costs Variable costs typically remain constant on a per unit basis However, total variable costs will rise or fall directly with increases or decreases in production and sales levels Increases in production volume per period result in higher levels of total variable costs Typical examples of variable costs include Labor laborers are paid an hourly rate The more hours worked (i e , more production), the higher will be the total costs for labor Parts and materials the costs of parts and materials used to build products remain constant on a per unit basis, but their totals obviously grow as output increases Utilities the costs of heat, electricity, water, etc are largely variable because their total volumes (and total costs) are generally tied directly to overall production volume Commissions sales commissions are variable because they are not paid unless the salesperson sells the product Total sales commissions increase as sales (and production) increase This is one cost that Firms are delighted to see increase, by the way Sales promotions the costs of couponing, rebates, and other promotional price discounts vary in magnitude with total sales, making them variable in nature Figure 1 also plots total variable costs as a function of production output Note the constantly increasing nature of the total variable cost curve Given the behavior of fixed and variable costs as a function of production volume, total costs are obtained by adding these fixed and variable costs together From a graphic perspective, the total cost curve is obtained by plotting total variable costs on top of total fixed costs Figure 1 Fixed and Variable Costs Add Together to Yield Total Costs Cost of Goods Sold Cost of goods sold for manufacturers normally includes both fixed and variable costs of production that can be directly traced to the production of a single product These costs, from our prior discussion, generally include the costs of direct parts and materials, direct labor costs, and general factory overhead All are directly attributed to the product (or products) sold Cost of goods sold does not include fixed and variable marketing costs, including logistics costs Cost of goods sold for wholesalers and retailers reflect the fact that these intermediaries only resell products made by other firms As a result, COGS for retailers and wholesalers normally only includes variable costs specifically, the purchase price of the product plus any inbound freight The same applies to restaurants COGS for restaurants are only the variable costs of food and beverages Labor costs involved for preparation and serving are not normally included Understanding Margins Gross, Operating, and Net Profit Margins Gross profit margin is the difference between total sales revenue and total cost of goods sold Gross profit margin can also be expressed on a per unit basis as the difference between price and unit COGS Gross profit margin can also be expressed as either a dollar amount or as a percentage If expressed as a percentage, it will be as a percentage of either total sales revenue or price For example, assume sales revenue of $50,000 If COGS is $25,000, then gross profit margin may be $25,000 (expressed as a dollar value) or $25,000 $50,000 5 or 50 (expressed as a percentage) These various ways of expressing gross profit margin are summarized in Table 1 below Table 1 Ways of Expressing Gross Profit Margins Operating profit margin is total sales revenue COGS other fixed variable costs (excluding interest and taxes) Operating profit margin is also referred to as EBIT (earnings before interest and taxes) The other fixed and variable costs will generally include fixed and variable marketing expenses and other indirect fixed costs that are not directly attributable to production of product (i e overhead) Like gross profit margin, operating profit margin can be express as a dollar amount or as a as a percentage Table 2 below illustrates operating profit margins expressed in dollars and percentage form Table 2 Expressing Operating Profit in Dollar and Percent Forms Net profit margin is computed by subtracting interest and taxes from operating profit margin Contribution and Contribution Margin Contribution (also called contribution margin) is an essential metric for marketing managers Both terms tend to be used interchangeably However, some practitioners prefer to reserve the term contribution margin for contribution expressed as a percent of sales We prefer the term contribution margin but will specifically identify whether contribution margin is to be expressed in currency or as a percent Contribution margin is hereafter abbreviated as CM Contribution margin expressed in dollars (or other currency) is essentially the difference between total sales revenue (TSR) and total variable costs (TVC) If expressed as a percent of sales, contribution ( contribution margin) is Unlike COGS, the variable costs included in computing contribution include all variable costs , not just those related to production Thus, all production and marketing related variable costs will be included Note that if the costs associated with COGS are all variable costs then gross profit equals the dollar contribution margin Contribution margin is considered to be a superior measure of profitability compared to gross profit and net profit because it specifically identifies the relative profitability of individual products and the contribution from those products available for covering the Firms remaining fixed costs Net Marketing Contribution 1 Moving beyond traditional measures of contribution margin and profit takes us to an examination of a similar metric, net marketing contribution (NMC) NMC is determined simply by subtracting all variable marketing costs ( VMC ) and direct fixed marketing cost s ( DFMC ) from gross profit margin (GPM) This metric more precisely shows managers how well expenditures on marketing are generating profitability for the firm It is a valuable metric that assesses the performance of the marketing efforts associated with the product The relevant formula is Net marketing contribution can also be expressed as a percent by dividing the dollar NMC by total sales revenue (TSR) If dealing with middlemen (wholesalers and retailers) or many firms in services industries for which cost of goods sold are all variable, then gross profit and dollar contribution margin ($CM) are the same Thus, gross profit already accounts for all variable marketing costs Further subtracting the direct fixed costs of marketing activities yields the net marketing contribution Putting It All Together Building the Income Statement and Contribution Statements Assume the following financial data for a hypothetical manufacturer custom furniture, Apex Industries Apex had sales in the last fiscal year of $10,000,000 Direct production costs included $2,500,000 for parts and materials, plus $1,000,000 in direct labor costs Marketing expenses included Sales Force Expenses of $1,000,000 that included salaries for sales manager and sales reps plus administrative costs of running the sales operation Sales Commissions of $500,000 Sales reps, in addition to their fixed salaries, received a 5 commission on sales Trade Media Advertising of $300,000 to stimulate brand awareness and demand for all of Apexs furniture products Point of Sale Media Production 0f $100,000 Production of point of sale brochures, fliers, and other materials used by retail sales personnel to support the sale of Apexs products Coop Ad Allowances of $500,000 A 5 of sales allowance provided to retailers to support local advertising of Apexs line Shipping Expenses of $800,000 In addition, there were general and administrative expenses including Administrative Overhead of $250,000 Manufacturing Overhead of $800,000 Executive Salaries and Benefits of $400,000 Table 3 presents a standard income statement that captures these data Costs of goods sold include the costs of parts and materials, plus the costs of direct labor totaling $3,500,000 and accounting for 35 of revenue In this case, COGS is comprised of all variable costs Gross profit is therefore $6,500,000 or 65 of revenue Marketing expenses include both fixed and variable costs Sales commissions, cooperative advertising allowance, and shipping are all variable totaling 17 of total revenue All remaining marketing expenses are direct fixed costs in that they directly support the marketing and sales of Apexs furniture line Manufacturing overhead of $800,000 is also a direct fixed cost Finally, the last category of fixed costs is associated with supporting overall administrative and manufacturing activities The resulting operating profit before taxes and interest is $1,850,000 The operating profit margin is, therefore, 18 5 Table 3 Standard Income Statement Lets recast the income statement in Table 3 into whats called a contribution margin statement The change is simple All that we need to do is rearrange some of the costs so that all variable costs are lumped together directly below sales revenue Table 4 presents the resulting statement Total variable costs (TVC) are $5,300,000 (53 of sales revenue) Subtracting TVC from sales revenue yields $4,700,000 This is the dollar contribution Expressed as a percentage, the contribution margin is 47 Total fixed costs are $3,200,000 $800,000 $650,000 $2,850,000 Operating profit remains the same as in Table 3 at $1,850,000 or 18 5 of sales revenue Table 4 Contribution Margin Statement One final variation on the income statement derived from the contribution margin statement in Table 4 is the Statement of Net Marketing Contribution shown below in Table 5 The highlighted cells in Table 5 separate out the direct fixed marketing costs from all other fixed costs Total DFMC equals $1,400,000 resulting in $NMC equal to $3,300,000 and NMC of 33 One interprets this latter percent as the percent of each sales dollar available for covering additional fixed expenses and providing for profit Clearly, management should strive to optimize the percent NMC Effective and efficient marketing programs should be capable of generating more revenue at lower costs, driving up the magnitude of the NMC metric Alternative marketing programs should be compared with one another in terms of their NMC and $NMC Marketing programs felt to be deficient based on these metrics are candidates for re tooling or elimination Table 5 Statement of Net Marketing Contribution Now Its Your Turn Show Us What You Know The following scenario and exercises are based on the prior discussion You will be given revenue and costs information for Shannons Brewery, the subject of our previous exercises Based on these data, you will be required to estimate some revenue data, determine relevant fixed and variable costs, and compute COGS, contribution margin, and net marketing contribution For questions requiring an answer expressed in dollars be sure and round your answer to the nearest dollar Question Completion Status QUESTION 1 Consider the following revenue and cost data for Shannons Brewery in Keller, Texas Shannons sells 35 of its craft beer production through its own on premise taproom The bulk of its sales (65 ) are made off premise via various retail outlets including supermarkets, bars, and restaurants 40 of its of sales (on premise and off premise) consists of package sales (bottles and cans) Of this 40 , beer sold in cans accounts for 80 with sales of bottled beer accounting for the remaining 20 Finally, the bulk of Shannons craft beer sales (60 ) occurs in kegs (31 gallons per keg) The costs incurred by Shannons for producing and selling its craft beers are as follows Beer sold in kegs Includes the direct costs of ingredients and packaging Beer sold in bottles and cans Includes the direct costs of ingredients and packaging Shrinkage and WIP loss Losses from theft, damage, deterioration Direct Labor Hourly labor costs for production and brew house operations Contract Labor Hourly costs of contract labor hired during periods of peak demand Shipping Shipping and handling costs to the wholesaler Consumer Advertising Advertising in local cable TV and print media Digital Media Promotion Costs of promotion in social media and website maintenance Sales Promotion Brochures, give away items (specialty items), gifts not considered to be volume sensitive Salaries and Benefits Cost of management salaries, retirement, and healthcare benefits For each cost listed below from the above discussion, identify whether that cost is fixed or variable in nature A B Beer in kegs A B Beer in bottles and cans A B Shrinkage and WIP A B Direct Labor A B Contract Labor A B Shipping A B Consumer Advertising A B Digital Media Promotion A B Sales Promotion , A B Salaries Benefits A Variable B Fixed QUESTION 2 Consider the following revenue and cost data for Shannons Brewery in Keller, Texas Shannons sells 35 of its craft beer production through its own on premise taproom The bulk of its sales (65 ) are made off premise via various retail outlets including supermarkets, bars, and restaurants 40 of its of sales (on premise and off premise) consists of package sales (bottles and cans) Of this 40 , beer sold in cans accounts for 80 with sales of bottled beer accounting for the remaining 20 Finally, the bulk of Shannons craft beer sales (60 ) occurs in kegs (31 gallons per keg) Assume that overall sales for FY 2015 are expected to be $1,296,149 Given the proportions of beer sold in kegs, bottles, and cans, what will be the predicted dollar sales of beer sold in kegs QUESTION 3 Assume the following costs in each of the categories identified in question one are Packaged (Cans Bottles) $150,817 Kegs $77,780 Shrinkage WIP Loss $42,000 Contract Labor $9,000 Direct Labor $240,000 Freight $18,000 Consumer Advertising $30,000 Trade Promotion $30,000 Sales Promotion $18,000 Salaries Benefits $180,000 What is Shannon's cost of goods sold QUESTION 4 Assume that projected revenue for 2015 is 1,310,304 Also assume the following projected 2015 costs in each of the cost categories from question one Packaged (Cans Bottles) $166,491 Kegs $61,632 Shrinkage WIP Loss $42,000 Contract Labor $9,000 Direct Labor $240,000 Freight $18,000 Consumer Advertising $30,000 Trade Promotion $30,000 Sales Promotion $18,000 Salaries Benefits $180,000 Given these costs, compute Shannons projected contribution margin in dollars QUESTION 5 Assume that total sales revenue for 2015 is projected to be $1,041,167 Assume also the following costs for Shannons Brewery Packaged (Cans Bottles) $126,010 Kegs $64,397 Shrinkage WIP Loss $42,000 Contract Labor $9,000 Direct Labor $240,000 Freight $18,000 Consumer Advertising $30,000 Trade Promotion $30,000 Sales Promotion $18,000 Salaries Benefits $180,000 Compute Shannons NMC Round your answer to the nearest percent For example, if your computed answer is 99 4 your answer rounds down to 99 If your computed answer is 99 5 you should round up to 100 DO NOT INCLUDE THE SIGN IN YOUR ANSWER

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The Costs of Marketing The costs of marketing or doing business in general fall into two categories: Fixed Costs and Variable Costs. This discussion is

The Costs of Marketing The costs of marketing or doing business in general fall into two categories: Fixed Costs and Variable Costs. This discussion is based in part on material in Chapter 15: Pricing & Price Management. Fixed Costs Fixed costs are costs that do not change as production increases or decreases. No matter how many units are produced and sold, these costs (in total) remain about the same. Fixed costs can be direct or indirect. Also called programmed fixed costs, direct fixed costs are those fixed costs that can be directly attributed to the production or marketing of a specific product or service. Such fixed costs are typically incurred to support a specific marketing program. Typical examples of direct fixed costs include: Fixed production costs supporting the manufacture of a specific product such as costs related to plant and equipment including depreciation, rent, maintenance contracts, depreciation, etc. These are generally constant. Equipment maintenance, however, could change with output, if additional production results in the need for more maintenance. Sales force Expenses -- Such as salaries for managers, sales persons, and administrative staff, and general administrative costs. Brand Advertising -- costs to advertise in various media generally are treated as fixed. Total advertising costs usually vary by marketing program rather than by production and sales volume. Marketing support activities such as marketing research and administration Sales promotions that are not volume sensitive such as public relations and other special promotions that support brand advertising. Indirect fixed costs, often referred to as overhead or committed fixed costs, are incurred to support the overall business effort. These costs cannot be traced or attributed to supporting the production or marketing of any specific product. Examples of committed fixed costs include: Institutional Advertising intended to bolster the image of the company as a whole Salaries of executives managers receive the same salary no matter how much product is made in a given time period. Customer relations efforts not directly related to a single product Taxes many taxes, such as real estate taxes, do not change with production volume. Figure 1 plots total fixed costs as a function of production output. The line parallel to the output axis emphasizes that these costs remain constant with increases (or decreases) in production per time period. Variable Costs Variable costs typically remain constant on a per unit basis. However, total variable costs will rise or fall directly with increases or decreases in production and sales levels. Increases in production volume per period result in higher levels of total variable costs. Typical examples of variable costs include: Labor laborers are paid an hourly rate. The more hours worked (i.e., more production), the higher will be the total costs for labor. Parts and materials the costs of parts and materials used to build products remain constant on a per unit basis, but their totals obviously grow as output increases. Utilities the costs of heat, electricity, water, etc. are largely variable because their total volumes (and total costs) are generally tied directly to overall production volume. Commissions sales commissions are variable because they are not paid unless the salesperson sells the product. Total sales commissions increase as sales (and production) increase. This is one cost that Firms are delighted to see increase, by the way. Sales promotions the costs of couponing, rebates, and other promotional price discounts vary in magnitude with total sales, making them variable in nature. Figure 1 also plots total variable costs as a function of production output. Note the constantly increasing nature of the total variable cost curve. Given the behavior of fixed and variable costs as a function of production volume, total costs are obtained by adding these fixed and variable costs together. From a graphic perspective, the total cost curve is obtained by plotting total variable costs on top of total fixed costs. Figure 1. Fixed and Variable Costs Add Together to Yield Total Costs. Cost of Goods Sold Cost of goods sold for manufacturers normally includes both fixed and variable costs of production that can be directly traced to the production of a single product. These costs, from our prior discussion, generally include the costs of direct parts and materials, direct labor costs, and general factory overhead. All are directly attributed to the product (or products) sold. Cost of goods sold does not include fixed and variable marketing costs, including logistics costs. Cost of goods sold for wholesalers and retailers reflect the fact that these intermediaries only resell products made by other firms. As a result, COGS for retailers and wholesalers normally only includes variable costs; specifically, the purchase price of the product plus any inbound freight. The same applies to restaurants. COGS for restaurants are only the variable costs of food and beverages. Labor costs involved for preparation and serving are not normally included. Understanding Margins Gross, Operating, and Net Profit Margins Gross profit margin is the difference between total sales revenue and total cost of goods sold: Gross profit margin can also be expressed on a per unit basis as the difference between price and unit COGS: Gross profit margin can also be expressed as either a dollar amount or as a percentage. If expressed as a percentage, it will be as a percentage of either total sales revenue or price. For example, assume sales revenue of $50,000. If COGS is $25,000, then gross profit margin may be $25,000 (expressed as a dollar value) or $25,000/$50,000=.5 or 50% (expressed as a percentage). These various ways of expressing gross profit margin are summarized in Table 1 below. Table 1. Ways of Expressing Gross Profit Margins Operating profit margin is total sales revenue - COGS - other fixed & variable costs (excluding interest and taxes). Operating profit margin is also referred to as EBIT (earnings before interest and taxes). The other fixed and variable costs will generally include fixed and variable marketing expenses and other indirect fixed costs that are not directly attributable to production of product (i.e. overhead). Like gross profit margin, operating profit margin can be express as a dollar amount or as a as a percentage. Table 2 below illustrates operating profit margins expressed in dollars and percentage form. Table 2. Expressing Operating Profit in Dollar and Percent Forms Net profit margin is computed by subtracting interest and taxes from operating profit margin. Contribution and Contribution Margin Contribution (also called contribution margin) is an essential metric for marketing managers. Both terms tend to be used interchangeably. However, some practitioners prefer to reserve the term contribution margin for contribution expressed as a percent of sales. We prefer the term contribution margin but will specifically identify whether contribution margin is to be expressed in currency or as a percent. Contribution margin is hereafter abbreviated as CM. Contribution margin expressed in dollars (or other currency) is essentially the difference between total sales revenue (TSR) and total variable costs (TVC): If expressed as a percent of sales, contribution (% contribution margin) is: Unlike COGS, the variable costs included in computing contribution include all variable costs, not just those related to production. Thus, all production and marketing-related variable costs will be included. Note that if the costs associated with COGS are all variable costs then gross profit equals the dollar contribution margin. Contribution margin is considered to be a superior measure of profitability compared to gross profit and net profit because it specifically identifies the relative profitability of individual products and the contribution from those products available for covering the Firms remaining fixed costs. Net Marketing Contribution[1] Moving beyond traditional measures of contribution margin and profit takes us to an examination of a similar metric, net marketing contribution (NMC). NMC is determined simply by subtracting all variable marketing costs (VMC) and direct fixed marketing costs (DFMC) from gross profit margin (GPM). This metric more precisely shows managers how well expenditures on marketing are generating profitability for the firm. It is a valuable metric that assesses the performance of the marketing efforts associated with the product. The relevant formula is: Net marketing contribution can also be expressed as a percent by dividing the dollar NMC by total sales revenue (TSR): If dealing with middlemen (wholesalers and retailers) or many firms in services industries for which cost of goods sold are all variable, then gross profit and dollar contribution margin ($CM) are the same. Thus, gross profit already accounts for all variable marketing costs. Further subtracting the direct fixed costs of marketing activities yields the net marketing contribution. Putting It All Together Building the Income Statement and Contribution Statements Assume the following financial data for a hypothetical manufacturer custom furniture, Apex Industries. Apex had sales in the last fiscal year of $10,000,000. Direct production costs included $2,500,000 for parts and materials, plus $1,000,000 in direct labor costs. Marketing expenses included: Sales Force Expenses of $1,000,000 that included salaries for sales manager and sales reps plus administrative costs of running the sales operation. Sales Commissions of $500,000. Sales reps, in addition to their fixed salaries, received a 5% commission on sales. Trade & Media Advertising of $300,000 to stimulate brand awareness and demand for all of Apexs furniture products. Point-of-Sale Media Production 0f $100,000. Production of point of sale brochures, fliers, and other materials used by retail sales personnel to support the sale of Apexs products. Coop Ad Allowances of $500,000. A 5% of sales allowance provided to retailers to support local advertising of Apexs line. Shipping Expenses of $800,000. In addition, there were general and administrative expenses including: Administrative Overhead of $250,000 Manufacturing Overhead of $800,000 Executive Salaries and Benefits of $400,000. Table 3 presents a standard income statement that captures these data. Costs of goods sold include the costs of parts and materials, plus the costs of direct labor totaling $3,500,000 and accounting for 35% of revenue. In this case, COGS is comprised of all variable costs. Gross profit is therefore $6,500,000 or 65% of revenue. Marketing expenses include both fixed and variable costs. Sales commissions, cooperative advertising allowance, and shipping are all variable totaling 17% of total revenue. All remaining marketing expenses are direct fixed costs in that they directly support the marketing and sales of Apexs furniture line. Manufacturing overhead of $800,000 is also a direct fixed cost. Finally, the last category of fixed costs is associated with supporting overall administrative and manufacturing activities. The resulting operating profit before taxes and interest is $1,850,000. The operating profit margin is, therefore, 18.5%. Table 3. Standard Income Statement Lets recast the income statement in Table 3 into whats called a contribution margin statement. The change is simple. All that we need to do is rearrange some of the costs so that all variable costs are lumped together directly below sales revenue. Table 4 presents the resulting statement. Total variable costs (TVC) are $5,300,000 (53% of sales revenue). Subtracting TVC from sales revenue yields $4,700,000. This is the dollar contribution. Expressed as a percentage, the contribution margin is 47%. Total fixed costs are $3,200,000 + $800,000 + $650,000 = $2,850,000. Operating profit remains the same as in Table 3 at $1,850,000 or 18.5% of sales revenue. Table 4. Contribution Margin Statement One final variation on the income statement derived from the contribution margin statement in Table 4 is the Statement of Net Marketing Contribution shown below in Table 5. The highlighted cells in Table 5 separate out the direct fixed marketing costs from all other fixed costs. Total DFMC equals $1,400,000 resulting in $NMC equal to $3,300,000 and %NMC of 33%. One interprets this latter percent as the percent of each sales dollar available for covering additional fixed expenses and providing for profit. Clearly, management should strive to optimize the percent NMC. Effective and efficient marketing programs should be capable of generating more revenue at lower costs, driving up the magnitude of the %NMC metric. Alternative marketing programs should be compared with one another in terms of their %NMC and $NMC. Marketing programs felt to be deficient based on these metrics are candidates for re-tooling or elimination. Table 5. Statement of Net Marketing Contribution. Now Its Your Turn. Show Us What You Know The following scenario and exercises are based on the prior discussion. You will be given revenue and costs information for Shannons Brewery, the subject of our previous exercises. Based on these data, you will be required to estimate some revenue data, determine relevant fixed and variable costs, and compute COGS, contribution margin, and net marketing contribution. For questions requiring an answer expressed in dollars be sure and round your answer to the nearest dollar.

image text in transcribed Question Completion Status:

QUESTION 1

Consider the following revenue and cost data for Shannons Brewery in Keller, Texas. Shannons sells 35% of its craft beer production through its own on-premise taproom. The bulk of its sales (65%) are made off-premise via various retail outlets including supermarkets, bars, and restaurants. 40% of its of sales (on-premise and off-premise) consists of package sales (bottles and cans). Of this 40%, beer sold in cans accounts for 80% with sales of bottled beer accounting for the remaining 20%. Finally, the bulk of Shannons craft beer sales (60%) occurs in kegs (31 gallons per keg).

The costs incurred by Shannons for producing and selling its craft beers are as follows:

Beer sold in kegs. Includes the direct costs of ingredients and packaging.

Beer sold in bottles and cans. Includes the direct costs of ingredients and packaging.

Shrinkage and WIP loss. Losses from theft, damage, deterioration.

Direct Labor. Hourly labor costs for production and brew house operations.

Contract Labor. Hourly costs of contract labor hired during periods of peak demand.

Shipping. Shipping and handling costs to the wholesaler.

Consumer Advertising. Advertising in local cable TV and print media.

Digital Media Promotion. Costs of promotion in social media and website maintenance.

Sales Promotion. Brochures, give-away items (specialty items), gifts not considered to be volume sensitive.

Salaries and Benefits. Cost of management salaries, retirement, and healthcare benefits.

For each cost listed below from the above discussion, identify whether that cost is fixed or variable in nature.

- A. B.	Beer in kegs.
- A. B.	Beer in bottles and cans.
- A. B.	Shrinkage and WIP.
- A. B.	Direct Labor.
- A. B.	Contract Labor.
- A. B.	Shipping.
- A. B.	Consumer Advertising.
- A. B.	Digital Media Promotion.
- A. B.	Sales Promotion.,
- A. B.	Salaries & Benefits.

A.	Variable
B.	Fixed.

QUESTION 2

QUESTION 3

Assume the following costs in each of the categories identified in question one are:

Packaged (Cans & Bottles)	$150,817
Kegs	$77,780
Shrinkage/WIP Loss	$42,000
Contract Labor	$9,000
Direct Labor	$240,000
Freight	$18,000
Consumer Advertising	$30,000
Trade Promotion	$30,000
Sales Promotion	$18,000
Salaries & Benefits	$180,000

What is Shannon's cost of goods sold?

QUESTION 4

Assume that projected revenue for 2015 is 1,310,304. Also assume the following projected 2015 costs in each of the cost categories from question one:

Packaged (Cans & Bottles)	$166,491
Kegs	$61,632
Shrinkage/WIP Loss	$42,000
Contract Labor	$9,000
Direct Labor	$240,000
Freight	$18,000
Consumer Advertising	$30,000
Trade Promotion	$30,000
Sales Promotion	$18,000
Salaries & Benefits	$180,000

Given these costs, compute Shannons projected contribution margin in dollars.

QUESTION 5

Assume that total sales revenue for 2015 is projected to be $1,041,167. Assume also the following costs for Shannons Brewery:

Packaged (Cans & Bottles)	$126,010
Kegs	$64,397
Shrinkage/WIP Loss	$42,000
Contract Labor	$9,000
Direct Labor	$240,000
Freight	$18,000
Consumer Advertising	$30,000
Trade Promotion	$30,000
Sales Promotion	$18,000
Salaries & Benefits	$180,000

Compute Shannons %NMC. Round your answer to the nearest percent. For example, if your computed answer is 99.4% your answer rounds down to 99%. If your computed answer is 99.5% you should round up to 100%. DO NOT INCLUDE THE % SIGN IN YOUR ANSWER.