Bài giảng Appendix B: Profitability Analysis

Profitability AnalysisAppendix BAbsolute ProfitabilityAbsolute profitability measures the impact on the organization’s overall profits of adding or dropping a particular segment such as a product or customer – without making any other changes.Computing Absolute ProfitabilityFor an Existing SegmentCompare the revenues that would be lost fromdropping that segment to the costs that would be avoided.For a New SegmentCompare the additional revenues from addingthat segment to the costs that would be incurred.Learning Objective B-1Compute the profitability index and use it to select from among possible actions.Relative ProfitabilityRelative profitability is concerned with ranking products, customers, and other business segments to determine which should be emphasized in an environment of scarce resources.Relative ProfitabilityManagers are interested in ranking segments if a constraint forces them to make trade-offs among segments.In the absence of a constraint, all segments that are absolutely profitable should be pursued.Relative ProfitabilityProfitabilityindexIncremental profit from the segmentAmount of the constrained resources required by the segment=Incremental profit from the segment isthe absolute profitability of the segment.Profitability IndexManagement of Matrix, Inc. developed the following information concerning its two segments:Project Profitability IndexThe project profitability index is used when a company has more long-term projects with positive net present values than it can fund.From Chapter 8Project Profitability IndexThe net present value of the project goes in the numerator since it represents the incremental profit from the segment.From Chapter 8Project Profitability IndexThe investment funds are theconstraint, so the amount of investmentrequired by a project goes in the denominator.From Chapter 8Learning Objective B-2Compute and use the profitability index in volume trade-off decisions.Volume Trade-Off DecisionsVolume trade-off decisions need to be made when a company must produce less than the market demands for some products due to the existence of a constraint.Volume Trade-Off DecisionsProfitability indexfor a volumetrade-off decisionUnit contribution marginAmount of the constrained resourcerequired by one unit=Volume trade-off decisions need to be made when a company must produce less than the market demands for some products due to the existence of a constraint.Learning Objective B-3Compute and use the profitability index in other business decisions.Sales CommissionsSales commissions are based on gross selling price. If you were a salesperson at Matrix, which product would you prefer to sell?RX200Sales CommissionsHowever, RX200 is the least profitable product,given the current machine constraint. It might bea better idea to base sales commissions on theprofitability index for each product.Pricing New ProductsThe price of a new product should at least cover the variable cost of producing it plus the opportunity cost of displacing the production of existing products to make it.Selling priceof newproductVariable costof the newproductOpportunity costper unit of theconstrainedresourceAmount of theconstrainedresource requiredby a unit of thenew product≥+×Pricing New ProductsMatrix, Inc. is planning to introduce a new product – WR6000. The variable cost of production is $30 per unit and requires six minutes of constrained machine time per unit.What is the minimum selling price Matrix should charge for product WR6000?Selling priceof newproduct$30Opportunity costper unit of theconstrainedresourceAmount of theconstrainedresource requiredby a unit of thenew product≥+×Pricing New ProductsThe first step is to recognize that the price ofWR6000 must cover its $30 variable cost per unit.Pricing New ProductsThe second step is to recognize that producing WR6000 will require displacing production of RX200, VB30, or SQ500.Since RX200 has the lowest profitability indexof $3 per minute it should be displaced first.Pricing New ProductsThe third step is to compute the opportunity cost per unit associated with displacing production of RX200 ($18 per unit).Pricing New ProductsThe fourth step is to add the variable cost per unit ($30) to the opportunity cost per unit ($18) to arrive at the minimum selling price ($48).End of Appendix B