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


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


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


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


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


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






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






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


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


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


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


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


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


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?

profitability control

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