Evaluating the Financial Impact of Marketing Decisions

The variable margin rate allows you to convert changes in sales into changes in profit so you can evaluate many types of marketing decisions. The calculation is straightforward:

Change in profit = Change in sales x Variable margin rate

So, for example, if you think a promotion will increase sales of your product or service by $100,000 and your variable margin rate is 32 percent, then you would expect your contribution to increase by $32,000. If the fixed cost of the proposed promotion is $10,000, then you may want to go ahead as your net profit will increase $22,000.

You can use this approach to evaluate many marketing decisions such as advertising, sales promotion, and personal selling.

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