Estimating Costs and Profits

After preparing the sales forecast, management should estimate expected costs and profits. Costs are estimated by the R&D, manufacturing, marketing, and finance departments. Table 2.3 illustrates a five-year projection of sales, costs, and profits for the instant breakfast drink.

Row 1 shows the projected sales revenue over the five-year period. The company expects to sell $11,889,000 (approximately 500,000 cases at $24 per case) in the first year. Behind this sales projection is a set of assumptions about the rate of market growth, the company's market share, and the factory-realized price.

Row 2 shows the cost of goods sold, which hovers around 33 percent of sales revenue. This cost is found by estimating the average cost of labor, ingredients, and packaging per case.

Row 3 shows the expected gross margin, which is the difference between sales revenue and cost of goods sold.

affecting profitability under an assumed marketing environment and marketing strategy for the planning period. The computer simulates possible outcomes and computes a rate-of-return probability distribution showing the range of possible rates of returns and their probabilities.21

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