Deck 15: Marketing Cost and Profitability Analysis

Question 1

The correct formula for determining rate of return on investment (ROI)is as follows:

Answer 1

False

Question 2

A major purpose of a marketing cost analysis is to discover unprofitable segments and inefficiently performed functions of a business.

Answer 2

True

Question 3

A marketing cost analysis by territories often shows that the 80-20 principle is in effect.

Answer 3

True

Question 4

The task of allocating ledger expenses among the activity groups is relatively easy,because the ledger expenses all are direct expenses.

Question 5

It may be a sound marketing strategy to accept some orders that are below the break-even point.

Question 6

While it is a useful tool for financial analysis,the concept of Return on Assets Managed (ROAM)is not helpful when evaluating field sales managers.

Question 7

Regarding a marketing cost analysis,cost is a function of volume.

Question 8

The usual procedure in marketing cost analysis is to group the marketing expenses into activity classifications and then allocate these activity expenses to the accounting-ledger accounts.

Question 9

If a territory is abandoned,some of the costs previously allocated to it must now be borne by other districts,and this may make a formerly profitable territory now show a loss.

Question 10

The term "overhead costs" usually is synonymous with the concept of direct (separable)expenses.

Question 11

If management will conduct a detailed marketing cost analysis,then there is no need to make a volume analysis.

Question 12

The contribution-margin approach should never be used in a marketing cost analysis by products or territories.

Question 13

The majority of expenses are direct costs,and are easy to allocate.

Question 14

A company may continue to carry a product even though it shows an irreducible net loss,because the product may be necessary to round out a line and the customers expect the seller to carry it.

Question 15

Regarding the relationship between a marketing cost analysis and the usual accounting system in a firm,accounting maintains a historical record of a company's financial events;a marketing cost analysis is a tool designed more for use in planning and controlling a company's future operations.

Question 16

An analysis of marketing costs as they are recorded in accounting ledgers is of no value for purposes of managerial planning and evaluation.

Question 17

A given cost,such as sales force salaries,which is a direct expense when making a territorial cost analysis,may be an indirect expense in a product cost analysis.

Question 18

Management cannot make meaningful marketing decisions based on a marketing cost analysis unless the "full-cost" approach was used in the analysis.

Question 19

One strategy to combat the small-order problem is to establish a minimum-order size or to set a minimum charge per order.

Question 20

In the contribution-margin approach in a marketing cost analysis,only the direct expenses are allocated to the marketing units being studied.

Question 21

In contrast to a sales-volume analysis,a marketing cost analysis will:

A)Give us an estimate of our share of market.
B)Indicate our sales by products and by territories.
C)Prevent an 80-20 situation from occurring in our firm.
D)Determine the profitability of our products and territories.
E)Prevent us from violating the Robinson-Patman Act regarding price discrimination.

Question 22

ABC Company's total sales volume is $10 million,with a cost of goods sold equal to 50% of sales,and total indirect expenses of $2 million.The Eastern territory has sales volume that equals $1 million and direct expenses of $200,000.In a full-cost,marketing cost analysis that uses the proportion of sales volume to allocate indirect expenses,the net profit of the Eastern territory is:

A)zero (no profit)
B)$100,000
C)$300,000
D)$500,000
E)None of these

Question 23

For a more effective marketing cost analysis,sales executives usually regroup ledger expenses into various:

A)activity classifications
B)administrative groups
C)operating statements
D)accounting groups
E)sales volume categories

Question 24

Sales force travel expenses would be:

A)an indirect territorial cost,but a direct product cost.
B)a direct territorial cost,but an indirect product cost.
C)a direct cost for both territorial and product analyses.
D)an indirect cost for both territorial and product analyses.
E)neither a direct nor an indirect cost.

Question 25

The simplest and least expensive marketing cost analysis results from an analysis of:

A)Ledger expenses.
B)Functional expense.
C)Functional costs by market segment.
D)The contribution margin.
E)All costs by territories.

Question 26

All of the following are methods used to allocate indirect costs in a marketing cost analysis,EXCEPT:

A)divide cost equally across all territories.
B)allocate cost in proportion to sales volume obtained from each territory.
C)allocate 100% of the cost to the largest territory.
D)allocate cost in same proportion as total direct costs of each territory.
E)All of these are methods commonly used.

Question 27

Which of the following is most likely to be the title of an activity expense classification rather than an expense category found in accounting ledgers?

A)Branch office rent.
B)Sales reps' commissions.
C)Office supplies.
D)Warehousing.
E)Advertising salaries.

Question 28

Regarding the relationship between marketing cost analysis and a company's accounting system:

A)A cost analysis is a complete historical record of financial activities.
B)A cost analysis is more concerned with the planning and control of the future rather than the record of the past.
C)A marketing cost analysis provides the data for the accounting system.
D)Both are largely routine in nature,involving much record keeping.
E)A cost analysis is a basic part of the accounting system.

Question 29

In a marketing cost analysis,billing expenses are often allocated across territories on the basis of:

A)the number of salespeople.
B)the profitability of each bill.
C)the number of invoice lines.
D)the number of pages of advertising.
E)None of these.

Question 30

An analysis of sales volume tells us nothing about the ______________ of each territory.

A)usefulness
B)popularity
C)relative success
D)profitability
E)All of these

Question 31

Generally speaking,accounting records are ____________;whereas a marketing cost analysis is ____________.

A)for accountants;for salespeople
B)highly accurate;a guesstimate
C)to keep track of past financial information;for the purpose of future planning
D)complex;simple
E)All of these.

Question 32

In analysis of ledger expenses (as one form of marketing cost analysis):

A)Management cannot easily compare this year's costs with those from previous years.
B)This is the most useful type of marketing cost analysis for field sales executives.
C)It cannot be done without first allocating the ledger costs into activity categories.
D)It is generally considered to be the easiest,quickest,and least expensive of the major types of marketing costs analyses.
E)None of these is correct.

Question 33

An analysis of ledger expenses:

A)is one of the most valuable types of analysis for a sales organization.
B)provides highly detailed information.
C)is a relatively expensive type of analysis.
D)can be looked at over time to determine trends.
E)All of these.

Question 34

In a marketing cost analysis,the textbook identifies three methods used to allocate indirect costs.One method is to divide indirect cost equally among territories.This method:

A)is the easiest of the three methods.
B)is the most accurate method.
C)is the method that is fairest to all territories.
D)uses the underlying philosophy of applying the cost burden to where it can best be borne.
E)None of these.

Question 35

One limitation of a sales volume analysis which is corrected by a marketing cost analysis is that the cost analysis:

A)Overcomes misdirected marketing effort.
B)Prevents a company from violating the Robinson-Patman Act.
C)Determines the profitability of territories or products.
D)Saves the company the time and expense of a marketing audit.
E)Prevents the 80-20 principle from being in operation in the firm.

Question 36

In a marketing cost analysis,ledger expenses:

A)Are expense categories taken from the company's regular accounting system.
B)Are deducted from gross margins to get contributed margins.
C)Are derived by allocating activity costs to the various ledger categories.
D)Cannot be used in their present form.
E)None of these is correct.

Question 37

A(n)is a detailed study of the operating expense section of a company's profit and loss statement.

A)Sales volume analysis.
B)Marketing audit.
C)Marketing cost analysis.
D)Organizational audit.
E)Financial statement.

Question 38

A ledger expense,in contrast to an activity expense group,is:

A)Marketing administration.
B)Direct selling.
C)Transportation and shipping.
D)Warehousing.
E)Branch office rent.

Question 39

Regarding the relationship between marketing cost analysis and production cost accounting:

A)In controlling marketing costs,management is concerned with the effect or influence that costs have on sales volume.
B)Marketing cost analysis is usually more exact than production cost accounting.
C)In marketing,the costs usually are computed only for units of a product.
D)Production cost accounting is not a part of the regular accounting system.
E)None of these is a difference between the two.

Question 40

ABC Company's total sales volume is $10 million,with a cost of goods sold equal to 50% of sales,and total indirect expenses of $2 million.The Eastern territory has sales volume that equals $1 million and direct expenses of $200,000.In a marketing cost analysis,the contribution margin of the Eastern territory is:

A)zero (no profit)
B)$100,000
C)$300,000
D)$500,000
E)None of these

Question 41

Supporters of the contribution-margin approach to marketing cost analysis believe that:

A)All functional costs should be attributed to each marketing unit being analyzed.
B)The contribution-margin approach is the 80:20 principle in action.
C)A marketing cost study is intended to determine the net profitability of the marketing units being analyzed.
D)It is not possible to accurately allocate indirect costs among products or market segments.
E)Unless all costs are allocated among the marketing units,management will not know how a territory or product line is contributing to the organization's success or failure.

Question 42

One of the best arguments in favor of the full-cost approach to cost allocation is that:

A)It is easy to establish defensible bases of allocation.
B)It is less expensive and less time consuming than the contribution-margin approach.
C)The allocation bases are not as arbitrary as in the contribution margin approach.
D)Management in the territory (or whatever marketing unit is being analyzed)is made more aware of all costs - direct and indirect - than is true under the contribution-margin method.
E)In the long run all costs are variable.

Question 43

Most of the problems in cost allocation arise in connection with ___________ costs.

A)Direct.
B)Indirect.
C)Variable.
D)Ledger.
E)Separable

Question 44

Regarding the full-cost vs.contribution-margin controversy:

A)Contribution-margin assumes that all costs are variable.
B)The company's net profit will be different depending upon which of the two accounting methods is used.
C)Contribution margin and gross margin essentially are the same.
D)The full-cost method is the better of the two approaches.
E)None of these is correct.

Question 45

Regarding the full-cost vs.contribution-margin controversy:

A)The contribution-margin approach focuses on indirect cost allocation.
B)Management decisions cannot be made on the basis of contribution-margin analysis alone.
C)Contribution-margin tells us how much a marketing unit (territory,product)contributed to cover fixed costs,but it does not give us the net profit of the unit.
D)All costs are allocated in the contribution-margin approach.
E)The final answer for a territory or product is the same in either approach,but the contribution-margin approach gives us more detail.

Question 46

In a marketing cost analysis:

A)A given marketing cost is always allocated on the same basis.
B)To determine the contribution margin of product groups,you must allocate all marketing expenses among these product groups.
C)A common approach is to allocate ledger expenses to activity-cost groups,and then allocate these activity costs among marketing units such as territories or products.
D)Indirect expenses should not be allocated if you want to know the net profit of a territory or product.
E)In a well-managed firm all marketing costs will be direct costs.

Question 47

As a part of a marketing cost analysis,the activities of order filling and shipping are _______________ costs.

A)Partially indirect.
B)Totally indirect.
C)Totally direct.
D)Intermediate.
E)Fixed direct.

Question 48

When a marketing cost analysis shows that a territory is unprofitable,which of the following is management likely to do in order to make this district profitable?

A)Increase the advertising in this territory.
B)Adjust the territorial boundaries.
C)Change the selling methods or the channels of distribution in the district.
D)Any or All of these.
E)Only two of the above.

Question 49

Suppose a marketing manager wishes to allocate activity costs to product lines.The first step in such an allocation process is:

A)Determine the total number of allocation units.
B)Select an appropriate allocation basis for distributing the cost of each activity among the product lines.
C)Estimate the net profit for each product line.
D)Determine the total costs associated with each advertisement,each sales call,each order processed,etc.
E)Determine total costs associated with each territorial sales office.

Question 50

Which of the following is the best reason for using the contribution-margin approach in a marketing cost analysis by product line?

A)The net profit of each product line is what we are trying to determine.
B)Full allocation of all costs is the best accounting practice.
C)To go beyond allocation of measurable costs is to allocate indirect costs on an arbitrary basis.
D)When analyzing marketing costs by products,all such costs are indirect.
E)In the long run all costs must be covered.

Question 51

A reason for using the contribution-margin approach in a marketing cost analysis is that:

A)It tells management which territories or products are profitable.
B)Arbitrarily allocating indirect expenses to individual territories or products can give misleading information to management.
C)Ledger costs can be allocated into activity groups.
D)Each marketing unit (product,territory,for example)should bear its full share of costs.
E)This approach is especially useful as a basis for long-range planning.

Question 52

Each sales rep in our firm has his own territory and sells our three product lines.Ten reps operate out of each of our seven branches.Which of the following is most likely to be a direct territorial expense?

A)Rent for branch offices.
B)Advertising product A in TIME magazine.
C)Branch managers' salaries.
D)General sales manager's salary.
E)Sales rep's travel expenses.

Question 53

Suppose a marketing manager was conducting a marketing cost analysis.In doing so,she wanted to allocate activity costs to each of three sales offices.What would be the most appropriate approach for allocating personal selling expenses?

A)Selling expenses should be allocated to the sales office from which they were generated.
B)Each sales office should assume one-third of the total sales expenses.
C)Sales expenses should be allocated to each office on a basis proportionate to sales;that is,if sales were $15 million,$35 million,and $50 million,respectively,sales expenses for each office should be 15 percent,35 percent,and 50 percent of the total sales expenses.
D)Sales expenses should be prorated according to the size of the force in each office.
E)Each sales office should assume 30 percent of the total sales expenses with the remaining 10 percent charged to the home office for general sales administration.

Question 54

If a certain territory or product were to be eliminated from a company's marketing program,all ____________ expenses tied to that marketing unit would be eliminated.

A)Indirect.
B)Fixed.
C)Common.
D)Direct.
E)Overhead.

Question 55

Marketing cost analysis is not likely to be used in:

A)Selecting the most profitable sales territory.
B)Determining the minimum profitable order size.
C)Deciding what products to drop from the line.
D)Handling the small order problem.
E)Determining the market potential.

Question 56

An argument in favor of the "full-cost" approach to cost allocation is:

A)In the long run all costs are fixed.
B)With a good accounting system,we can accurately allocate any expense.
C)Essentially,the whole purpose of a marketing cost analysis is to determine the net profitability of the marketing unit being studied.
D)It is easy to establish defensible bases for allocating expenses.
E)It is a good basis for short-run decision making at the district or regional sales force level.

Question 57

When a marketing cost analysis by territories shows that a given territory is unprofitable,which of the following courses of action should be adopted as a last resort?

A)Adjust territorial boundaries.
B)Use telephone selling instead of personal calls by salespeople in that district.
C)Use middlemen instead of selling direct to users.
D)Adjust the promotional program for that district.
E)Abandon the territory entirely.

Question 58

Suppose a marketing manager was conducting a marketing cost analysis.In doing so,he wanted to allocate activity costs to each of four unrelated product lines.What would be the most appropriate approach for allocating advertising expenses?

A)25 percent of the cost of each ad should be allocated to each product line.
B)25 percent of the total marketing budget should be allocated to each product line.
C)Assuming the product lines are advertised separately,the direct advertising expenses for each ad should be allocated to its respective product line.
D)Advertising expenses should be prorated on the basis of product line profitability such that the more profitable lines would assume a greater proportion of the advertising expenses than the less profitable lines.
E)Advertising expenses should be prorated on the basis of sales for each product line such that the lines with the greater sales volume would assume a greater proportion of the advertising expenses.

Question 59

Suppose each salesperson is assigned to one of six separate territories in the sales region.When analyzing marketing costs by sales territory,which is not a direct cost?

A)Regional manager's salary.
B)Sales force salaries.
C)Office supplies.
D)Sales force commissions.
E)Travel expenses of sales representatives.

Question 60

The most beneficial (to management)type of marketing cost analysis is to study these costs:

A)As they appear in the ledger accounts - the "object-of-expenditure" costs.
B)As they appear on a profit and loss statement.
C)After they have been allocated to products,territories,or some other marketing unit.
D)Before they have been grouped into activity classifications.
E)Before they are split up into small segments.

Question 61

A manufacturer is likely to reduce the loss on small orders by:

A)Having salespeople call more frequently on small-order accounts.
B)Bypassing the wholesalers and dealing directly with customers.
C)Encouraging customers to buy on a hand-to-mouth basis.
D)Reducing quantity discounts.
E)Changing pricing structure to pass some of the costs on to the buyer.

Question 62

One method to reduce the loss on small orders is to:

A)Reduce the quantity discounts.
B)Educate the customers as to the costs they (the customers)are incurring by ordering in small quantities.
C)Have the sales reps call more frequently on these accounts.
D)Bypass wholesalers and deal directly with these customers.
E)Encourage customers to buy on a hand-to-mouth basis.

Question 63

A company's return on investment is least likely to be affected by a change in that company's:

A)Net sales.
B)Marketing cost analysis.
C)Net profit.
D)Investment.
E)Total assets.

Question 64

Management can increase its return on investment by:

A)Increasing its rate of profit on sales.
B)Decreasing its expense while increasing its investments.
C)Increasing its rate of capital (asset)turnover.
D)Doing any of the above.
E)Doing only two of the A-B-C above.

Question 65

A territory's return on investment is influenced by that territory's:

A)Sales volume.
B)Contribution margin.
C)Accounts receivable and inventory.
D)All of these.
E)Only two of A-B-C above.

Question 66

Which of the following is the best reason for continuing to carry a product when a sales-volume analysis indicates it is a low-volume item?

A)The primary demand for the product is declining.
B)The product accounts for 5 percent of the total sales;however,its profit contribution is negative.
C)The item is needed to round out the company's product line.
D)The product's gross margin is correspondingly low.
E)None of these.

Question 67

When a marketing cost analysis by products shows a net loss for one product,which of the following alternatives is management likely to adopt as a last resort?

A)Raise the price,especially if the product has an inelastic demand.
B)Drop the product from the line.
C)Redesign or repackage the product.
D)Simplify the assortment by eliminating some sizes or colors of this product.
E)Reduce the price,especially if the product has an elastic demand.

Question 68

When a marketing cost analysis by territories shows a net loss for a territory,which of the following is management likely to do only as a last resort?

A)Abandon the losing territory.
B)Reevaluate territorial boundaries.
C)Use different channels to reach the market in that district.
D)Increase the advertising appropriation for the district.
E)Substitute mail or telephone selling instead of some of the personal calls by salespeople.

Question 69

A small-order problem is likely to arise for a seller when its customers:

A)Try to spread their purchases among several different suppliers.
B)Prefer to order once a month instead of weekly.
C)Avoid buying on a hand-to-mouth basis.
D)Like to take advantage of quantity discounts.
E)None of these is likely to generate small orders.

Question 70

Which of the following is likely to increase the average size of orders received by a manufacturer?

A)Decreasing quantity discounts.
B)Changing from selective to intensive (mass)distribution.
C)Discontinuing the use of wholesalers and selling directly to retailers.
D)Call on small-order accounts less frequently.
E)None of these is likely to increase the order size.