Q.1 What are the differences between International Marketing and Domestic Marketing?List the principles of international Marketing

Ans: International Marketing vs. Domestic Marketing

The striking difference between international and domestic marketing lies in the environment in which the two take place. The important points of differences between international and domestic marketing are:

1. Sovereign Political Entities: Each country is a sovereign political entity and, therefore, they for importing and exporting the goods and services in order to safeguard their national interest impose several restrictions. The traders in international marketing have to observe such restrictions. These restrictions may fall in any of the following categories.

i) Tariffs and customs duties on import and export of goods and services in order to make them costly in the importing country and not to ban their entry into the country completely. In the post war period, through the efforts of General Agreement on Tariffs and Trade (GATT) there has been a significant reduction in tariff globally and on regional basis due to the emergence of regional economic groupings.

ii) Quantitative restrictions are also imposed with an intention to restrict trade in some specific commodities. The major objective behind the restriction is the protection of home industries from the competition of the foreign commodities.

iii) Exchange control is another restriction imposed by almost every sovereign state. The Government, in some cases, does not ban the entry of goods in the country but the importer is not allowed the necessary foreign exchange to make the payment for the goods imported. But, in some cases, exchange control and quantitative controls are put together along with the grant of import licence.

iv) Imposition of more local taxes on imported goods with an object to make the imported goods costly is one of the restrictions in international marketing.

2. Different Legal Systems: Different countries operate different legal systems and they all differ from each other. In most of the countries follow English Common Law as modified from time to time. Japan and Latin American countries are important exceptions to this rule. The existence of different legal systems makes the task of businessmen more difficult as they are not sure as to which particular system will apply to their transactions. This difficulty does not arise in the domestic trade, as laws are the same for the whole country.

3. Different Monetary Systems: Each country has its own monetary system and the exchange rates for each country’s currency are fixed under the rules framed by the International Monetary Fund and, therefore, they are more or less fixed. However, in recent years the exchange rates are fluctuating and are being determined by demand and supply forces. Some countries operate multiple rates; i.e. different rates are applicable to different transactions.

4. Lower Mobility Factors of Production: Mobility of different factors of production is less as between nations than in the country, itself. However, with the advent of air transport, the mobility of labour has increased manifold. Similarly, the development of international banking has increased the mobility of capital and labour. In spite of these developments, the mobility of labour and capital is not as much as it is within the country itself.

5. Differences in Market Characteristics: Market characteristics in each segment are different, i.e. demand pattern, channels of distribution, methods of promotion etc. are quite different from market to market. If we take each country a separate market, we can assume different market characteristics there. These differences are accentuated due to the existence of government controls and regulations. However, this is a difference of degree only. Even in one single country, for example, India and America, these differences in market patterns may be found from state to state.

6. Differences in Procedure and Documentation: The centuries old laws and customs of trade in each country demand different procedures and documentary requirements for the import and export of the goods and services. The traders residing in the territory have to comply with these regulations and customs if they want import and export of goods and services.

1.4 Principles of International Marketing

The essence of international marketing can be summarized in three great principles. The first identifies the purpose and task of marketing, the second the competitive reality of marketing and the third the principal means for achieving the first two.

1.4.1 Customer value and the value equationThe task of marketing is to create customer value that is greater than the value created by competitors. The value equation is a guide to this task. As suggested in the equation, value for the customer can be increased by expanding or improving product and/or service benefits, by reducing the price, or by a combination of these elements. Companies with a cost advantage can use price as a competitive weapon. Knowledge of the customer combined with innovation and creativity can lead to a total offering that offers superior customer value. If the benefits are strong enough and valued enough by customers, a company does not need to be the low-price competitor to win customers.

1.4.2 Competitive or differential advantageThe second great principle of international marketing is competitive advantage. A competitive advantage is a total offer, vis-à-vis relevant competition that is more attractive to customers. The advantage can exist in any element of the company’s offer: the product, the price, the advertising and point-of-sale promotion, or the distribution of the product. One of the most powerful strategies for penetrating a new national market is to offer a superior product at a lower price. The price advantage will get immediate customer attention, and, for those customers who purchase the product, the superior quality will make an impression.

V = B/P

Where,

V = Value

B = perceived benefits – perceived costs (for example, switching costs)

P = price

1.4.3 FocusThe third international marketing principle is focus, or the concentration of attention. Focus is required to succeed in the task of creating customer value at a competitive advantage. All great enterprises, large and small, are successful because they have understood and applied this great principle. IBM succeeded and became a great company because it was more clearly focused on customer needs and wants than any other company in the emerging data-processing industry.

One of the reasons IBM found itself in crisis in the early 1990s was that its competitors had become much more clearly focused on customer needs and wants. Dell and Compaq, for example, focused on giving customers computing power at low prices: IBM was offering the same computing power at higher prices.

A clear focus on customer needs and wants and on the competitive offer is required to mobilize the effort needed to maintain a differential advantage. This can be accomplished only by focusing or concentrating resources and efforts on customer needs and wants and on how to deliver a product that will meet those needs and wants.

One way to understand the concept of international marketing is to examine how international marketing differs from such similar concepts as domestic marketing, foreign marketing, comparative marketing, international trade, and multinational marketing.

Domestic Marketing is concerned with marketing practices within researchers or marketers’ home country.

Foreign Marketing encompasses the domestic operations within the foreign country. A US company considers marketing in United States as domestic marketing and marketing in Great Britain as foreign marketing.

Comparative Marketing is the one when its purpose is to contrast two or more marketing systems rather than examine a particular country’s marketing system for its own sake.

International Trade is concerned with the flow of goods and services across national borders. The focus of the analysis is on commercial and monetary conditions that affect balance of payment and resource transfer.

International Marketing on the other hand, is more concerned with micro level of market and uses the company as a unit of analysis

Multinational (Global or World) Marketing is the preferred term for some of the authors since nothing is foreign or domestic about the world market and global opportunities. One might question whether the subtle difference between the international marketing and multinational marketing is significant. For practical purposes, it is merely a distinction without a difference. As a matter of fact, multinational firms themselves do not make any distinction between the two terms. It is difficult to believe that International Business Machines will become more global if it changes its corporate name to Multinational Business Machines. Likewise, there is no compelling reason for American Express and British Petroleum to change their name to say Global Express and Multinational Petroleum. For purposes of discussion, international, global and multinational marketing are interchangeable.

Q.2 .Explain the important elements of culture. Differentiate between market allocation system and command allocation system.

Elements of culture

There are too many human variables and different types of international business functions for an exhaustive discussion about culture. The main elements of culture are:

1. Attitudes and Beliefs: The set of attitudes and beliefs of a culture will influence nearly all aspects of human behaviour, providing guidelines and organisation to a society and its individuals.

2. Attitudes towards Time: Everywhere in the world people use time to communicate with each other. In international business, attitudes towards time are displayed in behaviour regarding punctuality, responses to business communication, responses to deadlines, and the amount of time that is spent waiting in an outer office for an appointment.

3. Attitude towards Work and Leisure: People’s attitudes towards work and leisure are indicative of their views towards wealth and material gains. These attitudes affect the types, qualities and numbers of individuals who pursue entrepreneurial and management careers as well.

4. Attitude towards Achievement: In some cultures, particularly those with high stratified and hierarchical societies, there is a tendency to avoid personal responsibility and to work according to precise instructions received from supervisors that are followed by the latter. In many industrial societies, personal responsibility and the ability to take risks for potential gain are considered valuable instruments in achieving higher goals

5. Attitudes towards Change: The international manager must understand what aspects of a culture will resist change and how the areas of resistance differ among cultures, how the process of change takes place in different cultures and how long it will take to implement change.

6. Attitude towards Job: The type of job that is considered most desirable or prestigious varies greatly according to different cultures. Thus, while medical and legal professions are considered extremely prestigious in the United States, civil service is considered the most prestigious occupation in several developing countries including India.

Market allocation

A market allocation system is one that relies on consumers to allocate resources. Consumers “write” the economic plan by deciding what will be produced by whom. The role of the state in a market economy is to promote competition and ensure consumer protection. The United States, most Western European countries, and Japan – the triad countries that account for three quarters of gross world product – are examples of predominantly market economy.

Command allocation

In a command allocation system, the state has broad powers to serve the public interest. These include deciding which products to make and how to make them. Consumers are free to spend their money on what is available, but state planners make decisions about what is produced and, therefore, what is available. Because demand exceeds supply, the elements of the marketing mix are not used as strategic variables

Q.3 Define the term Trade Barrier. List the important differences between Tariff barrier and protective barrier . Trade Barriers

Trade barriers are any of a number of government-placed restrictions on trade between nations. The most common sorts of trade barriers are things like subsidies, tariffs, quotas, duties, and embargos.

Trade barriers may be: (i) Tariff barriers and (ii) Non-tariff or protective barriers.

Tariff barriersTariffs have been one of the classical methods of regulating international trade. Tariffs may be referred to as taxes levied on the imports.

Kinds of tariffs: Tariffs may be classified according to (i) the purpose of taxes, and (ii) how they are levied.

1. As far as the purpose of taxes is concerned, tariffs may be classified into two categories:

(a) Revenue tariffs are basically intended to raise the Government revenue without intending to protect any industry of the country. It is levied at a fairly low rate and does not obstruct the free flow of imports.

(b) Protective tariffs, on the other hand, aim at protecting the domestic industries and are generally levied at a very high rate and, therefore, obstruct the free flow of imports. Its main purpose is not to increase revenue but to provide a safeguard to the domestic industries against foreign competitions in the local market.

2. On the basis of method how tariffs are computed: Tariffs may be put into two categories:

(a) Specific duties or tariffs are imposed on the basis of per unit of any identifiable characteristics of merchandise

(b) Ad valorem tariffs are based on the value of imports and are charged in the form of a specific percentage of the value of goods.

3. Other tariffs: In order to protect the domestic industries, against competition, some other tariffs also imposed among them are important:

(a) Anti-dumping duties: The Government of the importing country imposes customs duty on some goods at a very high rate to counteract this unfair competition. This duty is known as ‘anti-dumping duties’. Such duties are charged in addition to the normal customs duty on the products.

(b) Counteracting duties: These are similar to the anti-dumping duties, and are charged on goods imported from countries where the manufacturer exporter is paid, directly or indirectly, a subsidy as an incentive for export.

Q.4 Discuss the various entry options available to a business .Explain the basic strategic decisions that a firm will adopt for foreign expansion.

Different Entry Modes and Market Entry Strategies

Various entry options available to a business are:

· Joint ventures

· Strategic Alliances

· Direct Investment

· Contract Manufacturing

· Franchising

The three basic strategic decisions that a firm contemplating foreign expansion make are: (a) which markets to enter, (b) when to enter those markets, and (c) on what scale.

Which foreign markets

There are number of nation-states in the world and all of then do not hold the same profit potential for a firm entering foreign markets. The choice must be based on an assessment of a nation’s long run profit potential. This potential is a function of several factors such as:

i) Detail of the economic and political factors that affect the potential attractiveness of a foreign market.

ii) Balancing of benefits, costs, and risks associated with doing business in that country.

iii) Study of factors such as the size of the market (in terms of demographics), the present wealth (purchasing power) of consumers in that market, and the likely future wealth of consumers.

iv) Potential long-run benefits bear little relationship to a nation’s current stage of economic development or political stability.

v) By following the above process a firm can rank countries in terms of their attractiveness and long run profit potential. Preference is then given to entering markets that rank highly.

Timing of entryOnce attractive markets have been identified, it is important to consider the timing of entry.

The advantages frequently associated with entering a market early are commonly known as first-mover advantages. One first mover advantage is the ability to preempt rivals and capture demand by establishing a strong brand name. A second advantage is the ability to build sales volume in that country and ride down the experience curve ahead of rivals, giving the early entrant a cost advantage over later entrants.

First-mover disadvantages may give rise to pioneering costs that an early entrant has to bear that a later entrant can avoid. Pioneering costs arise when the business system in a foreign country is so different from that in a firm’s home market that an enterprise has to devote considerable effort, time, and expense to learning the rules of the game e. g .costs of business failure due to ignorance of the foreign environment, certain liability associated with being a foreigner, the costs of promoting and establishing a product offering including the costs of educating customers, change in regulations in a way that diminishes the value of an early entrant’s investments.

Scale of entry and strategic commitmentsAnother issue that an international business needs to consider when contemplating market entry is the scale of entry. Entering a market on a large scale involves the commitment of significant resources.

Q.5 Define the process of international market segmentation. Discuss some widely used bases of segmentation

International Market Segmentation

Market segmentation is the process of subdividing a market into distinct subsets of customers that behave in the same way or have similar needs. Each subset may conceivably be chosen as a market target to be reached with a distinctive marketing strategy. Some widely used bases of segmentation are discussed below in sub sections.

Geographic segmentationGeographic segmentation is dividing the world into geographic subsets. The advantage of geography is proximity: Markets in geographic segments are closer to each other and easier to visit on the same trip or to call on during the same time window. Geographic segmentation also has major limitations: The mere fact that markets are in the same world geographic region does not meant that they are similar. Japan and Vietnam are both in East Asia, but one is a high-income, post-industrial society and the other is an emerging, less developed, pre-industrial society. The differences in the markets in these two countries overwhelm their similarities.

Demographic segmentationDemographic segmentation is based on measurable characteristics of population such as age, gender, income, education, and occupation. A number of demographic trends – aging population, fewer children, more women working outside the home, and higher incomes and living standards – suggest the emergence of international segments.

For most consumer and industrial products, national income is the single most important segmentation variable and indicator of market potential. Annual per capita income varies widely in world markets, from a low of $81 in the Congo to a high of $38.587 in Luxemburg. The World Bank segments countries into high income, upper middle income, lower middle income, and low income.

Age is another useful demographic variable. One international segment based on demographics is international teenagers – young people between the age of 12 and 19. Teens, by virtue of their interest in fashion, music, and a youthful lifestyle, exhibit consumption behaviour that is remarkably consistent across borders. Young consumers may not yet have conformed to cultural norms – indeed, they may be rebelling against them. This fact, combined with shared universal needs, desires, and fantasies (for name brands, novelty, entertainment, and trendy and image-oriented products), make it possible to reach the international teen segment with a unified marketing program.

Another international segment is the so-called elite: older, more affluent consumers who are well traveled and have the money to spend on prestigious products with an image of exclusivity. This segment’s needs and wants are spread over various product categories: durable goods (luxury automobiles); nondurables (upscale beverages such as rare wines and champagne); and financial services (American Express gold and platinum cards).

Psychographic segmentationPsychographic segmentation involves grouping people in terms of their attitudes, values, and lifestyles. Data are obtained from questionnaires that require

respondents to indicate the extent to which they agree or disagree with a series of statements. In the United States, psychographics is primarily associated with SRI International, a market research organization whose original VALS and updated VALS 2 analyses of U.S. consumers are widely known.

Behavioural segmentation Behavioural segmentation focuses on whether people buy and use a product, as well as how often and how much they use it. Consumers can be categorized in terms of usage rates – for example, heavy, medium, light, and nonuser. Consumers can also be segmented according to user status: potential users, nonusers, ex-users, regulars, first-timers, and users of competitors’ products. Although bottled water may be considered a luxury product in some high-income markets, Nestle is marketing bottled water in Pakistan where there is a huge market of nonusers who, despite their low income, are willing to pay 18 rupees a bottle for clean water because of the widespread presence of arsenic poisoning in well water and the pollution of surface water. Tobacco companies are targeting China because the Chinese are heavy smokers.

Benefit segmentationInternational benefit segmentation focuses on the numerator of the value equation – the B in V=B/P. This approach can achieve excellent results by virtue of marketer’s superior understanding of the problem a product solves or the benefit it offers, regardless of geography. For example, Nestle discovered that cat owners’ attitudes toward feeding their pets are the same everywhere. In response, a pan-European campaign was created for Friskies dry cat food. The appeal was that dry cat food better suits a cat’s universally recognised independent nature.

Vertical versus horizontal segmentationVertical segmentation is based on product category or modality and price points. For example, in medical imaging there is X-ray, Computed Axial Tomography (CAT) scan, Magnetic Resonance Imaging (MRI), and so on. Each modality has its own price points. These price points were the traditional way of segmenting the medical imaging market. One company decided to take a different approach and segment the same market by the health care delivery system: national research and teaching hospitals, government hospitals, and so on. It then rolled out a campaign that was regional, national, and finally International, which was tailored for each different types of health care delivery. This horizontal segmentation approach worked as well in markets outside the home-country launch market as it did in the home country.

Q.6 .Explain the significance of price factors in determining international market prices. Briefly describe the non price factors

Ans: Having a pricing objective isn’t enough. A firm also has to look at a myriad of other factors before setting its prices. Those factors include the offering’s costs, the demand, the customers whose needs it is designed to meet, the external environment—such as the competition, the economy, and government regulations—and other aspects of the marketing mix, such as the nature of the offering, the current stage of its product life cycle, and its promotion and distribution. If a company plans to sell its products or

services in international markets, research on the factors for each market must be analyzed before setting prices. Organizations must understand buyers, competitors, the economic conditions, and political regulations in other markets before they can compete successfully. Next we look at each of the factors and what they entail.

Customers

How will buyers respond? Three important factors are whether the buyers perceive the product offers value, how many buyers there are, and how sensitive they are to changes in price. In addition to gathering data on the size of markets, companies must try to determine how price sensitive customers are. Will customers buy the product, given its price? Or will they believe the value is not equal to the cost and choose an alternative or decide they can do without the product or service? Equally important is how much buyers are willing to pay for the offering. Figuring out how consumers will respond to prices involves judgment as well as research.

Price elasticity, or people’s sensitivity to price changes, affects the demand for products. Think about a pair of sweatpants with an elastic waist. You can stretch an elastic waistband like the one in sweatpants, but it’s much more difficult to stretch the waistband of a pair of dress slacks. Elasticity refers to the amount of stretch or change. For example, the waistband of sweatpants may stretch if you pull on it. Similarly, the demand for a product may change if the price changes. Imagine the price of a twelve-pack of sodas changing to $1.50 a pack. People are likely to buy a lot more soda at $1.50 per twelve-pack than they are at $4.50 per twelve-pack. Conversely, the waistband on a pair of dress slacks remains the same (doesn’t change) whether you pull on it or not. Likewise, demand for some products won’t change even if the price changes. The formula for calculating the price elasticity of demand is as follows.

Price elasticity = percentage change in quantity demanded ÷ percentage change in price

When consumers are very sensitive to the price change of a product—that is, they

buy more of it at low prices and less of it at high prices—the demand for it is price elastic. Durable goods such as TVs, stereos, and freezers are more price elastic than necessities. People are more likely to buy them when their prices drop and less likely to buy them when their prices rise. By contrast, when the demand for a product stays relatively the same and buyers are not sensitive to changes in its price, the demand is price inelastic. Demand for essential products such as many basic food and first-aid products is not as affected by price changes as demand for many nonessential goods.

The number of competing products and substitutes available affects the elasticity of demand. Whether a person considers a product a necessity or a luxury and the percentage of a person’s budget allocated to different products and services also affect price elasticity. Some products, such as cigarettes, tend to be relatively price inelastic since most smokers keep purchasing them regardless of price increases and the fact that other people see cigarettes as unnecessary. Service providers, such as utility companies in

markets in which they have a monopoly (only one provider), face more inelastic demand since no substitutes are available.

Competitors

How competitors price and sell their products will have a tremendous effect on a firm’s pricing decisions. If you wanted to buy a certain pair of shoes, but the price was 30 percent less at one store than another, what would you do? Because companies want to establish and maintain loyal customers, they will often match their competitors’ prices. Some retailers, such as Home Depot, will give you an extra discount if you find the same product for less somewhere else. Similarly, if one company offers you free shipping, you might discover other companies will, too. With so many products sold online, consumers can compare the prices of many merchants before making a purchase decision.

The availability of substitute products affects a company’s pricing decisions as well. If you can find a similar pair of shoes selling for 50 percent less at a third store, would you buy them? There’s a good chance you might. Recall from the five forces model discussed in Chapter   2, Strategic Planning that merchants must look at substitutes and potential entrants as well as direct competitors.

The Economy and Government Laws and Regulations

The economy also has a tremendous effect on pricing decisions. In Chapter   2, Strategic Planning we noted that factors in the economic environment include interest rates and unemployment levels. When the economy is weak and many people are unemployed, companies often lower their prices. In international markets, currency exchange rates also affect pricing decisions.

Pricing decisions are affected by federal and state regulations. Regulations are designed to protect consumers, promote competition, and encourage ethical and fair behavior by businesses. For example, the Robinson-Patman Act limits a seller’s ability to charge different customers different prices for the same products. The intent of the act is to protect small businesses from larger businesses that try to extract special discounts and deals for themselves in order to eliminate their competitors. However, cost differences, market conditions, and competitive pricing by other suppliers can justify price differences in some situations. In other words, the practice isn’t illegal under all circumstances. You have probably noticed that

restaurants offer senior citizens and children discounted menus. The movies also charge different people different prices based on their ages and charge different amounts based on the time of day, with matinees usually less expensive than evening shows. These price differences are legal. We will discuss more about price differences later in the chapter.

Price fixing, which occurs when firms get together and agree to charge the same prices, is illegal. Usually, price fixing involves setting high prices so consumers must pay a high price regardless of where they purchase a good or service. Video systems, LCD (liquid

crystal display) manufacturers, auction houses, and airlines are examples of offerings in which price fixing existed. When a company is charged with price fixing, it is usually ordered to take some type of action to reach a settlement with buyers.

Price fixing isn’t uncommon. Nintendo and its distributors in the European Union were charged with price fixing and increasing the prices of hardware and software. Sharp, LG, and Chungwa collaborated and fixed the prices of the LCDs used in

computers, cell phones, and other electronics. Virgin Atlantic Airways and British Airways were also involved in price fixing for their flights. Sotheby’s and Christie’s, two large auction houses, used price fixing to set their commissions.

One of the most famous price-fixing schemes involved Robert Crandall, the CEO of American Airlines in the early 1990s. Crandall called Howard Putnam, the CEO of Braniff Airlines, since the two airlines were fierce competitors in the Dallas market. Unfortunately for Crandall, Putnam taped the conversation and turned it over to the U.S. Department of Justice. Their conversation went like this:

Crandall: “I think it’s dumb—to pound—each other and neither one of us making a [expletive] dime.”

Putnam: “Well…”

Crandall: “I have a suggestion for you. Raise your—fares twenty percent. I’ll raise mine the next morning.”

Putnam: “Robert, we—

Crandall: “You’ll make more money and I will too.

Putnam: “We can’t talk about pricing.”

Crandall: “Oh, [expletive] Howard. We can talk about any [expletive] thing we want to talk about.”[235]”

By requiring sellers to keep a minimum price level for similar products, unfair trade laws protect smaller businesses. Unfair trade laws are state laws preventing large businesses from selling products below cost (as loss leaders) to attract customers to the store. When companies act in a predatory manner by setting low prices to drive competitors out of business, it is a predatory pricing strategy.

Similarly, bait-and-switch pricing is illegal in many states. Bait and switch, or bait advertising, occurs when a business tries to “bait,” or lure in, customers with an incredibly low-priced product. Once customers take the bait, sales personnel attempt to sell them more expensive products. Sometimes the customers are told the cheaper product is no longer available.

You perhaps have seen bait-and-switch pricing tactics used to sell different electronic products or small household appliances. While bait-and-switch pricing is illegal in many states, stores can add disclaimers to their ads stating that there are no rain checks or that limited quantities are available to justify trying to get you to buy a different product. However, the advertiser must offer at least a limited quantity of the advertised product, even if it sells out quickly.

Product Costs

The costs of the product—its inputs—including the amount spent on product development, testing, and packaging required have to be taken into account when a pricing decision is made. So do the costs related to promotion and distribution. For example, when a new offering is launched, its promotion costs can be very high because people need to be made aware that it exists. Thus, the offering’s stage in the product life cycle can affect its price. Keep in mind that a product may be in a different stage of its life cycle in other markets. For example, while sales of the iPhone remain fairly constant in the United States, the Koreans felt the phone was not as good as their current phones and was somewhat obsolete. Similarly, if a company has to open brick-and-mortar storefronts to distribute and sell the offering, this too will have to be built into the price the firm must charge for it.

The point at which total costs equal total revenue is known as the breakeven point (BEP). For a company to be profitable, a company’s revenue must be greater than its total costs. If total costs exceed total revenue, the company suffers a loss.

Total costs include both fixed costs and variable costs. Fixed costs, or overhead expenses, are costs that a company must pay regardless of its level of production or level of sales. A company’s fixed costs include items such as rent, leasing fees for equipment, contracted advertising costs, and insurance. As a student, you may also incur fixed costs such as the rent you pay for an apartment. You must pay your rent whether you stay there for the weekend or not. Variable costs are costs that change with a company’s level of production and sales. Raw materials, labor, and commissions on units sold are examples of variable costs. You, too, have variable costs, such as the cost of gasoline for your car or your utility bills, which vary depending on how much you use.

Consider a small company that manufactures specialty DVDs and sells them through different retail stores. The manufacturer’s selling price (MSP) is $15, which is what the retailers pay for the DVDs. The retailers then sell the DVDs to consumers for an additional charge. The manufacturer has the following charges:

Copyright and distribution charges for the titles $150,000

Package and label designs for the DVDs $10,000

Advertising and promotion costs $40,000

Reproduction of DVDs $5 per unit

Labels and packaging $1 per unit

Royalties $1 per unit

In order to determine the breakeven point, you must first calculate the fixed and variable costs. To make sure all costs are included, you may want to highlight the fixed costs in one color (e.g., green) and the variable costs in another color (e.g., blue). Then, using the formulas below, calculate how many units the manufacturer must sell to break even.

The formula for BEP is as follows:

BEP = total fixed costs (FC) ÷ contribution per unit (CU)contribution per unit = MSP – variable costs (VC)BEP = $200,000 ÷ ($15 – $7) = $200,000 ÷ $8 = 25,000 units to break even

To determine the breakeven point in dollars, you simply multiply the number of

units to break even by the MSP. In this case, the BEP in dollars would be 25,000 units times $15, or $375,000.