MM522 -- Notes on Budgeting and Marketing Arithmetic
The Final Exam may contain a question or two requiring that you have an
understanding and ability to conduct marketing arithmetic.
Read and understand this:
Companies have a variety of costs with which they grapple.
To keep things
simple, we will look at Variable Costs (VC) and Fixed Costs (FC).
The combination of VC and FC = TOTAL Costs.
In effect, VC + FC = TC.
What's a Fixed Cost (FC)?
Fixed costs (FC) are costs that do NOT vary as your
sales volume increases or decreases.
Whether you sell one widget or 50,000
widgets, these are known costs that your company will have to pay regardless of
volume of widgets sold.
Fixed Costs (FC)
might include fixed staff salaries, lease/rent, debt
service, insurance -- in effect, any KNOWN cost that will remain constant, e.g.,
your insurance premium for 12 months is $12,000… or $1,000 for each and
Whether you sell many widgets or sell nothing, you still have to
pay that monthly insurance premium!
Variable Costs (VC)
increase linearly as your sales increase or decrease. Some
examples of Variable Costs (VC) that companies have include raw materials and
thus the cost of goods sold, sales commissions, shipping charges, delivery
charges, hourly salaries and overtime, costs of direct materials or supplies and
Thus, an increase in widgets manufactured might necessitate more
plastic moldings, more gizmos, possible overtime, more electricity to run the
equipment that is used to manufacture the widgets, etc.
Each additional widget
manufactured increases your overall variable costs.