Profitability Control
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Transcript of Profitability Control
PROFITABILITY CONTROL
PROFIT
An absolute measure
PROFITABILITY
Relative to sales, capital employed etc.
Business Enterprises should have objective of Profitability and not Profit
Marketing ROI is best measure of profitability of marketing operations
Product generate Profit – Focus on Products
PROFITABILITY CONTROL
PRODUCT PERFORMANCE EVALUTION
Product Market Evaluation
Mar
ket
ProductO
ldOld
New
New
1
2
3
4
Quadrant 1 Minimum 25%
Quadrant 2 New Product in Old Market
Quadrant 4 Old Product in Old Market
Quadrant 3 Old Product in New Market
PROFITABILITY CONTROL
PRODUCT PERFORMANCE EVALUTION
Returns Margins Matrix
Mar
gin
ReturnLo
wLow
Hig
hHigh
1
2
3
4
Quadrant 1 Satisfactory Situation Retain Product Mix
Quadrant 2 Cut costs, adjust price. Entire dependence of price can be detrimental
Quadrant 4 Product needs a through check up. Long term solution or phase out products
Quadrant 3 Sell More, Manage Assets better. Turn and Earn
Marketing Organisations Should Aim For Maximum Products in Quadrant 1 and Minimum in Quadrant 4
PROFITABILITY CONTROLPRODUCT PERFORMANCE EVALUTIONPLC- Industry vis-à-vis FirmNew Product Launch
CO
MP
AN
YINDUSTRY
Introdu-ction
Maturity
Growth
Decline
Quadrant 1 Industry Launch, Company Launch Leadership Status
Quadrant 2 Industry Maturity, Company Launch Be Careful, Danger?
Quadrant 4 Industry decline, Company Launch, Problems
Quadrant 3 Industry Growth, Company Launch Good, Be Careful
Useful Guide for New Product Launch
Not a Financial Guideline
PROFITABILITY CONTROLPRODUCTWISE PROFITABILITY ANALYSIS Measurement of productwise profits can be
attempted by comparing sales revenues of each products with the cost associated with its production, selling and distribution
The Productwise Profitability Analysis Helps inIdentifying most profitable products, so that
more sales can be planned and attemptedAllocation of funds for future investments
among product divisionsMaintaining close control over cost. Knowledge
of incidence of cost helps in cost control
PROFITABILITY CONTROLPRODUCTWISE PROFITABILITY ANALYSIS Contribution Approach• Segregation of all costs into fixed and
variable components and tracing of only variable costs to the individual products
• Judges profitability by contribution earnedAbsorption Costing Approach• Traces all costs , irrespective if fixed or
variable, to individual product• Profits measured by differences between
sales value and total cost of sales of product
PROFITABILITY CONTROLPRODUCTWISE PROFITABILITY ANALYSIS MNC Ltd decided to analyse its selling and distribution cost forproducts A,B and C and arrive productwise profit or loss figuresSales Rs. 520,000Cost of Goods Sold Rs. 250,000Gross Profit on Sales Rs. 270,000Selling and Distribution Costs in Rs.Salesman’s Salaries 24,500Salesman’s Commission 27,500Sales Office Expenses 14,800Advertising 65,000Warehouse 4,500Packing and Shipping 5,600Transportation and Delivery 8,400Credit and Collection 4,100Bad Debts 9,410TOTAL 163, 810General and Administrative Expenses 41,250 Rs. 205,060Net Profit Rs. 64,940
PROFITABILITY CONTROLPRODUCTWISE PROFITABILITY ANALYSIS Additional Information
Product A B C
Sales Rs. 120,000 150,000 250,000
Cost of Goods Sold 55,000 70,000 125,000
Salesam’s Salaries 8,000 7,000 9,500
Salesman’s Commission 11,000 6,000 10,500
Advertising (%age) 20 20 60
Warehouse Space Occupied 1/3 1/3 1/3
Invoice Lines (P& S) 1,500 2,500 3,000
Transportation and Delivery(Kg) 5,500 6,000 8,500
Avg No. of Customer O/S (Rs.) 15,000 35,000 50,000
Ac. Receivable Uncollected 1.8% 1.5% 1.7%
Sales Office Expenses: Allocated in same ratio as P&S
General & Admin Exp: Allocated on the basis of sales
Make Productwise P&L Statement
PROFITABILITY CONTROLPRODUCTWISE PROFITABILITY ANALYSIS
Particulars Basis of Allocation Total Rs.Products
A B C
Sales Direct 520,000 120,000 150,000 250,000
Cost of Goods Sold Direct 250,000 55,000 70,000 125,000
GP on Sales (3) 270,000 65,000 80,000 125,000
S & D Cost (a)
Salesman Salary Actual 24,500 8,000 7,000 9,500
Salesman Commission Actual 27,500 11,000 6,000 10,500
S.O Exp Invoice Lines (15:25:30) 14,800 3,171 5,286 6,343
Advt Exp 1:1:3 65,000 13,000 13,000 39,000
Warehouse Space Occupied 4,500 1,500 1,500 1,500
P & S Invoice Lines (15:25:30) 5,600 1,200 2,000 2,400
Transport & Del Weight (55:60:85) 8,400 2,310 2,520 3,750
Credit & Collection Accounts O/S (15:35:50) 4,100 615 1,435 2,050
Bad Debts Ac. Receivable Uncollected (1.8:1.5:1.7) 9,410 3,388 2,823 3,199
Total 4 (a) 163,810 44,184 41,564 78,062
Gen & Admn Exp (b) Sales Value (12:15:25) 41,250 9,519 11,899 19,832
Total (4) 205,060 53,703 53,463 97,894
Net Profit (3-4) 64,940 11,297 26,537 27,106
PROFITABILITY CONTROLMARKETING COST ANALYSIS
Expenses Amount Rs.
Basis
Salesman Salary 100,000 Direct Charge
Salesman Commission 60,000 Sales Turnover
Sales Office Expenses 20,960 No. of Orders
Advt. General 50,000 Sales Turnover
Advt. Specific 220,000 Direct Charge
Packing 30,000 Total volume in CFt of products sold
Delivery Expenses 40,000 Total volume in CFt of products sold
Warehouse Expenses 10,000 Total volume in CFt of products sold
Credit Collection Exp. 12,960 No. of Orders
Total 543,920
A company produces a single product in three sizes, A, B and C. The following expenses are incurred on Marketing are sought to be traced to the sizes using the indicated bases
PROFITABILITY CONTROLMARKETING COST ANALYSIS
Particulars Total Size
A B C
No. of Salesman 10 4 5 1
Units Sold 10,400 3,400 4,000 3,000
No. of Orders 1,600 700 800 100
% age of Spe. Advt. 100 30 40 30
Sales Turnover Rs. 2,000,000 580,000 800,000 620,000
Volume of CFt per unit 5 8 17
The following data is also available
Calculate Marketing Cost per unit sold for each of the three sizesCalculate Marketing Cost as percentage to Sales Turnover
PROFITABILITY CONTROLMARKETING COST ANALYSIS
Expenses Basis of Allocation Total Rs.Size
A B C
S & D Cost
Salesman Salary Direct Charge (Ratio 4:5:1) 100,000 40,000 50,000 10,000
Salesman Comm. Sales Turnover (29:40:31)Ratio 60,000 17,400 24,000 18,600
S.O Exp No. of Orders (Ratio 7:8:1) 20,960 9,170 10,480 1,310
Advt Exp (General) Sales Turnover (Ratio 29:40:31) 50,000 14,500 20,000 15,500
Advt Exp (Specific) Direct Charge (Ratio 3:4:3) 220,000 66,000 88,000 66,000
Packing Volume in CFt (Ratio 17:32:51) 30,000 5,100 9,600 15,300
Delivery Expenses Volume in CFt (Ratio 17:32:51) 40,000 6,800 12,800 20,400
Warehousing Exp. Volume in CFt (Ratio 17:32:51) 10,000 1,700 3,200 5,100
Credit Collection Exp. No. of Orders (Ratio 7:8:1) 12,960 5,670 6,480 810
Total 543,920 166,340 224,560 153,020
Marketing Cost per unit Rs. 48.90 56.10 51.00
Marketing Cost to Turnover %age 28.68 28.07 24.68
PROFITABILITY CONTROLMARGINAL COSTINGTechnique of segregating Fixed and Variable
CostsArriving with a cost that would vary in proportion to
Production and Sales Marginal Costing is opposite to Absorption CostingFixed Costs tend to be unaffected by variation in
volume of production Variable Costs tend to vary directly by variation in
volume of productionDistinction should be made between Marginal Cost
of production and Marginal Cost of sales
PROFITABILITY CONTROLMARGINAL COSTING
Contribution – Difference between Sales Volume and Marginal Cost of Sales (Total Variable Cost)
Represents amount contributed towards Fixed Cost and Profits
C = SV – MCor C + MC = SVAlso C = P + FCor C – P = FCor C – FC = PAlso SV – MC = P + FCor P = SV – MC – FC
PROFITABILITY CONTROLCOST & PROFIT UNDER MARGINAL COSTING
CPU in Rs.
i Direct Material 40ii Variable Cost of Direct Labour 3iii Direct Expenses (Variable) 3iv Variable OH
Factory 3Office & Admin 1Selling & Dist 5 9
v Marginal Cost of Sales (i to iv) 55vi Selling Price 100vii Contribution per unit (vi – v) 45
Total Contribution on 1 lac units sold Rs. 45 LacsTotal Fixed Cost Rs. 25 LacsTotal Profit Rs. 20 Lacs
PROFITABILITY CONTROL
COST & PROFIT UNDER MARGINAL COSTING
Products do not earn Profits they offer Contribution
Fixed cost are not directly related to Products, they are only Period Costs
Total Fixed Costs are to be deducted from Total Contribution to get Total Profit
Marginal Cost Technique precludes apportionment of any Fixed Cost among products
Fixed Cost are therefore considered as Period Costs for arriving at Profits of the business
PROFITABILITY CONTROLCOST & PROFIT UNDER MARGINAL COSTING
X Ltd. Has three products A, B and C.
Hypothetical Profit build-up A B C
Sales Units 100,000 200,000 300,000
Contribution per unit 45 20 30
Total Contribution 4,500,000 4,000,000 9,000,000
Contribution Fund of Business 17,500,000
Total Fixed Cost of Business 7,500,000
Total Profit of Busines 10,000,000
PROFITABILITY CONTROLCOST & PROFIT UNDER MARGINAL COSTINGExamine change in profits with change in Sales Mix without
change in other factors. Assume total production capacity (interchangeable) is 6 lacs units
A B C
Sales Units 300,000 100,000 200,000
Contribution per unit 45 20 30
Total Contribution 13,500,000 2,000,000 6,000,000
Contribution Fund of Business 21,500,000
Total Fixed Cost of Business 7,500,000
Total Profit of Busines 14,000,000
PROFITABILITY CONTROLCOST & PROFIT UNDER MARGINAL COSTINGExamine change in profits with change in Sales Mix without
change in other factors. Assume total production capacity (interchangeable) is 6 lacs units
A B C
Sales Units 100,000 400,000 100,000
Contribution per unit 45 20 30
Total Contribution 4,500,000 8,000,000 3,000,000
Contribution Fund of Business 15,500,000
Total Fixed Cost of Business 7,500,000
Total Profit of Busines 8,000,000
PROFITABILITY CONTROLCOST & PROFIT UNDER MARGINAL COSTINGFavourable Sales Mix improves total profit. No change in Fixed
Cost. This therefore Period Cost and not Product Cost
C/S Ratio is Contribution to Sales Ratio. If Sale Price is 100 and Contribution is 40 then C/S Ratio is 40/100 = 0.4 or 40%
Product A B C
Sales Price Rs. 100 40 90
Marginal Cost 55 20 60
Contribution 45 20 30
C/S Ratio 45% 50% 33.33%Preferable Sales Mix As per Contribution per unit – In order of preference A, C, B (When Unit Sale is constrain)
As per C/S Ratio – In order of preference B,A,C(When Sale Price is constrain)
PROFITABILITY CONTROLMARGINAL COSTING BASIS FOR OPTIMUM
PRODUCT MIXTwo products – Constrains, different machine hours, raw
material availability, demand. Same machines but different contribution. Determine optimum product mix
Details A per unit B per unit
Sales Price Rs.100 Rs.120
Consumption of RM 2 kg 3 kg
Material Cost Rs. 10 Rs.15
Direct wages cost Rs. 15 Rs.10
Direct Expenses Rs.5 Rs. 6
Machine Hours used 3 2
OH Fixed Rs. 5 Rs.10
OH Variable Rs.15 Rs. 20
PROFITABILITY CONTROLMARGINAL COSTING BASIS FOR OPTIMUM
PRODUCT MIXComment on Profitability of each product (both use
same material) when – • Total sales potential in units is limited• Total sales potential in value is limited• Raw material is in short supply• Production capacity (in terms of machine hours) is
the limiting factorAssuming RM as the key factor and only 10,000 kg is
available and maximum sales potential of each product is 3,500 units
Find Product mix that will give maximum profit
PROFITABILITY CONTROLMARGINAL COSTING BASIS FOR OPTIMUM
PRODUCT MIX
Details A per unit B per unit
Direct Material Rs.10 Rs.15
Direct wages Rs.15 Rs.10
Direct expenses Rs. 5 Rs.6
Variable OH Rs.15 Rs.20
Marginal Cost Rs.45 Rs.51
Sales Rs.100 Rs.120
Contribution Rs.55 Rs.69
C/S ratio 0.55 0.575
Contribution per kg of RM Rs.27.50 Rs.23.00
Contribution per machine hour Rs.18.33 Rs.34.50
PROFITABILITY CONTROLMARGINAL COSTING BASIS FOR OPTIMUM
PRODUCT MIX
Profitability of each product • The higher the contribution per unit of the limiting
factor of limiting factor the more profitable is the product
Limiting Factor Ranking of products
Basis of Ranking
Sales Volume B A Unit Contribution
Sales Value / Sales Price B A C/S Ratio
RM A B Contribution per kg RM
Production Capacity (Machine Hours)
B A Contribution per machine hour
PROFITABILITY CONTROLMARGINAL COSTING BASIS FOR OPTIMUM
PRODUCT MIX
Profitability of each product • Which 3,500 units will be more profitable?• For which product the limited RM should be used
first for better profits?• Unit limitation is also a constrain
Product Units RM per unit in kg
Total RM used in kg
A 3,500 2 7,000
B 1,000 3 3,000
Total 10,000
PROFITABILITY CONTROLPRODUCTWISE PROFITABILITY ANALYSIS MNC Ltd decided to analyse its selling and distribution cost forproducts A,B and C and arrive productwise profit or loss figuresSales Rs. 520,000Cost of Goods Sold Rs. 250,000Gross Profit on Sales Rs. 270,000Selling and Distribution Costs in Rs.Salesman’s Salaries 24,500Salesman’s Commission 27,500Sales Office Expenses 14,800Advertising 65,000Warehouse 4,500Packing and Shipping 5,600Transportation and Delivery 8,400Credit and Collection 4,100Bad Debts 9,410TOTAL 163, 810General and Administrative Expenses 41,250 Rs. 205,060Net Profit Rs. 64,940
PROFITABILITY CONTROLPRODUCTWISE PROFITABILITY ANALYSIS Additional InformationProduct A B CSales Rs. 120,000 150,000 250,000Cost of Goods Sold 55,000 70,000 125,000Salesman's Salaries 8,000 7,000 9,500Salesman’s Commission 11,000 6,000 10,500Advertising (%age) 20 20 60Warehouse Space Occupied 1/3 1/3 1/3Invoice Lines (P& S) 1,500 2,500 3,000Transportation and Delivery(Kg) 5,500 6,000 8,500Avg No. of Customer O/S (Rs.) 15,000 35,000 50,000Ac. Receivable Uncollected 1.8% 1.5% 1.7%Sales Office Expenses: Allocated in same ratio as P&SGeneral & Admin Exp: Allocated on the basis of salesMake Productwise P&L Statement
What is the difference between Sales Analysis and Marketing Cost Analysis?
How can this help in business?
PROFITABILITY CONTROLA Company Manufactures Radios, Fans and Heaters and Markets in Mumbai, Nagpur and Pune. Sales Analysis for March 0X
Product Mumbai Nagpur Pune Total
Radios 120,000 200,000 50,000 370,000
Fans 60,000 40,000 20,000 120,000
Heaters 20,000 10,000 5,000 35,000
Total 200,000 250,000 75,000 525,000
GP – Radios 25%, Fans 40%, Heaters 30% on Sales
PROFITABILITY CONTROL
Selling CostDirectly Chargeable
Mumbai Nagpur Pune
Radios Fans Heaters Radios Fans Heaters Radios Fans Heaters
Print Advt 5,000 1,000 2,000 10,000 4,000 2,000 5,000 1,000 1,000
Cinema Advt 2,000 500 500 2,000 1,000 1,000 500 200 200
Salesman Comm 6,000 3,000 1,000 10,000 2,000 500 2,500 1,000 250
Tel. Exp. 300 100 100 500 100 100 100 100 150
Entertainment 4,000 1,000 2,000 5,000 1,000 1,500 1,000 500 500
TOTAL 17,300 5,600 5,600 27,500 8,100 5,100 9,100 2,800 2,100
Direct Selling Costs for March 0X
PROFITABILITY CONTROL
Indirect Selling Costs for March 0X
Indirect Selling Costs Basis of DistributionExecutive Office 12,000 Equally among Territories Service Dept. Cost 15,000 & Lines of ProductsOther SP Expenses 25,000 Ratio of Actual Sales
Prepare Comparative P&L Statement for Territories and Product Lines
What is the difference between Profit and Profitability? Which is more important in business and why?