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Transcript of R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA...
![Page 1: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/1.jpg)
Proprietary MaterialDo not copy, post, or pass along in any form.
R.V.A. & P.V.A.Revenue & Profit Variance Analysis
![Page 2: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/2.jpg)
Profit Increase
Profit Variance Analysis
Base Profit
New Profit
The objective of a PVA is to explain – either retrospectively
or prospectively – the sources (causes) of change in
profitability between periods.
Based on an understanding of these profit drivers, strategies
and tactics can be modified for higher profitability.
?
?
?
?
?
?
![Page 3: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/3.jpg)
How much did profit increase (or decrease) because:
• The “real” market (in units) grew or shrunk
• Production factors cost more or less (cost inflation) or
productivity (amount of inputs required to produce a
unit of output) increased or decreased
• The company gained or lost market share (in units)
• The company raised or lowered prices
• Other factors effected profitability (e.g. a shift in “mix”
from higher to less profitable products)
PVA: Profit Variance Analysis
![Page 4: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/4.jpg)
PVA: Profit Variance Analysis
• Determine the total period-to-period
change to be reconciled
• Change one factor at a time, in this order:
(1) External factors before internal factors
(2) „Real‟ factors before „nominal‟ factors
“Real” = in units or net of inflation
“Nominal” = current dollars, inflated
![Page 5: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/5.jpg)
PVA: Profit Variance Analysis
![Page 6: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/6.jpg)
Proprietary MaterialDo not copy, post, or pass along in any form.
R.V.A. & P.V.A.Revenue & Profit Variance Analysis
![Page 7: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/7.jpg)
WARNINGThis material is intended strictly for current MSB students in MARK 557
(Price, Value & Profitability)
Any “pass along” of the material or its access information -- in any form – verbal, printed or simply viewed -- now or ever -- to anyone not currently enrolled in MARK 557 -- is a breach of academic integrity policies and is subject to disciplinary action.
![Page 8: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/8.jpg)
Profit Increase
Profit Variance Analysis
Base Profit
New Profit
The objective of a PVA is to explain – either retrospectively
or prospectively – the sources (causes) of change in
profitability between periods.
Based on an understanding of these profit drivers, strategies
and tactics can be modified for higher profitability.
?
?
?
?
?
?
![Page 9: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/9.jpg)
How much did profit increase (or decrease) because:
• The “real” market (in units) grew or shrunk
• Production factors cost more or less (cost inflation) or
productivity (amount of inputs required to produce a
unit of output) increased or decreased
• The company gained or lost market share (in units)
• The company raised or lowered prices
• Other factors effected profitability (e.g. a shift in “mix”
from higher to less profitable products)
PVA: Profit Variance Analysis
![Page 10: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/10.jpg)
Price
Market
Share
Profit IncreaseBase Profit
New Profit
Mix
PVA: Profit Variance Analysis
Cost
![Page 11: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/11.jpg)
Assumptions
Base Case (e.g. this year)
• Market estimate: 100,000 units
• Sold 10,000 units at $10 each
(Market share = 10 %)
• Variable costs = $10.00
• Fixed costs = $19.000
Projection(e.g. this year)
• Market grew to 130,000 units
• Sold 14,000 units at $10.50 each
(Market share = 10.8 %)
• Variable costs = $10.50
• Fixed costs = $18.000
Example
Process
![Page 12: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/12.jpg)
Assumptions
Base Case (e.g. this year)
• Market estimate: 100,000 units
• Sold 10,000 units at $10 each
(Market share = 10 %)
• Variable costs = $10.00
• Fixed costs = $19.000
Projection(e.g. this year)
• Market grew to 130,000 units
• Sold 14,000 units at $10.50 each
(Market share = 10.8 %)
• Variable costs = $10.50
• Fixed costs = $18.000
2.
Reconcile
1. Construct P&L
![Page 13: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/13.jpg)
Start with RVA Revenue Variance Analysis
To do a PVA :
![Page 14: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/14.jpg)
PVA RVA
Reconcile revenue not profit
Same factors except cost
RVA: Revenue Variance Analysis
![Page 15: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/15.jpg)
Price
Market
Share
Revenue IncreaseBase Revenue
New Revenue
Mix
RVA: Revenue Variance Analysis
![Page 16: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/16.jpg)
RVA Example
![Page 17: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/17.jpg)
Assumptions
In the base year (e.g. last year):
• Market estimate: 100,000 units
• Sold 10,000 units at $10 each
(Market share = 10 %)
In the projection year (e.g. this year):
• Market grew to 130,000 units
• Sold 14,000 units at $10.50 each
(Market share = 10.8 %)
Starting Point
![Page 18: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/18.jpg)
Assumptions
Calculate period-to-period factor changes(may be useful in subsequent analytical steps)
![Page 19: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/19.jpg)
• Calculate the revenue in each period
• Determine the total period-to-period
change to be reconciled
Assumptions
![Page 20: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/20.jpg)
• Determine the total period-to-period
change to be reconciled
• Change one factor at a time, in this order:
(1) External factors before internal factors
(2) „Real‟ factors before „nominal‟ factors
“Real” = in units or net of inflation
“Nominal” = current dollars, inflated
Assumptions
More specifically …
![Page 21: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/21.jpg)
$100,000
$147,000
$47,000
1. Calculate the base case revenue
Assumptions
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$100,000
$47,000
$147,000
1. Calculate the base case revenue.
2. Recalculate revenue using the
projected market size.
The difference is the portion of the
revenue change attributable to
market growth.
Assumptions
![Page 23: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/23.jpg)
$30,000
$100,000
$47,000
$147,000
1. Calculate the base case revenue.
2. Recalculate revenue using the
projected market size.
3. Recalculate revenue using the
projected market share (applied
to the projected market).
The difference is the portion of the
revenue change attributable to
market share gain (loss).
Assumptions
![Page 24: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/24.jpg)
$30,000
$10,000
$100,000
$47,000
$147,000
1. Calculate the base case revenue.
2. Recalculate revenue using the
projected market size.
3. Recalculate revenue using the
projected market share.
4. Recalculate revenue using the
projected price.
The difference is the portion of the
revenue change attributable to
price.
Assumptions
![Page 25: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/25.jpg)
Price
Market
Share
Revenue IncreaseBase Revenue
New Revenue
Mix
RVA –Revenue Variance Analysis
What‟s left unexplained …
![Page 26: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/26.jpg)
$100,000
$30,000
$10,000
$7,000
$0
$147,000
$47,000
1. Calculate the base case revenue.
2. Recalculate revenue using the
projected market size.
3. Recalculate revenue using the
projected market share.
4. Recalculate revenue using the
projected price.
Note that market, share and price explain the entire revenue
change ($47,000) … there is no mix impact in this example.
![Page 27: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/27.jpg)
Price
Market
Share
Revenue IncreaseBase Revenue
New RevenueNew Revenue
Mix
RVA RVA ––Revenue Variance AnalysisRevenue Variance Analysis
Assess the implications re:Strategy? Tactics? Execution?
![Page 28: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/28.jpg)
From RVA to PVA …
![Page 29: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/29.jpg)
RVA PVA
Reconcile profit not revenue
Add cost factors to analysis
From RVA to PVA …
![Page 30: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/30.jpg)
Price
Market
Share
Profit IncreaseBase Profit
New Profit
Mix
PVA: Profit Variance Analysis
Cost
![Page 31: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/31.jpg)
Sequence in
the analysis
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• Fixed (overhead, programs)
• Variable (labor, material, etc.)
• Inflation (price of factor inputs)
• Productivity (more output, less input)
Cost factors to consider
![Page 33: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/33.jpg)
PVA Example
![Page 34: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/34.jpg)
Assumptions
• Same assumptions as in the RVA example, plus …
• Variable costs increase from $10.00 per unit to $10.50
• Fixed costs decrease from $20,000 per year to $19,000
![Page 35: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/35.jpg)
Assumptions
![Page 36: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/36.jpg)
Assumptions
Apply the same analytical logic
as in the RVA example, except:
Insert steps (between market
and share) to determine the
impact of variable and fixed costs.
Note: cost impact can be further
broken down into inflation,
productivity, etc.
![Page 37: R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA Profit... · or prospectively –the sources (causes) ... RVA PVA Reconcile profit](https://reader037.fdocuments.in/reader037/viewer/2022110223/5abfecdf7f8b9aa15e8e95a0/html5/thumbnails/37.jpg)
Proprietary MaterialDo not copy, post, or pass along in any form.
R.V.A. & P.V.A.Revenue & Profit Variance Analysis