Transcript Profitability and Productivity Analysis

Profitability and Productivity Analysis
Profitability and Productivity Analysis
 Productivity Analysis
is the assessment of the
sales or market share
consequences of a
marketing strategy
 Profitability Analysis
is the assessment of the
impact of various
marketing strategies on
the profit contribution
that can be expected
from a product or
product line
Factors to Consider in Making Marketing
Expenditures
Expected Productivity
in Terms of Sales
Impact on
Profitability Structure
Decision
Product Objective
Industry Sales
Forecast
LINKSTER INC: Profit and Loss Statement
Sales ................................................................................................... $4640
Less cost of goods sold ................................. ...................... 2300
Gross Profit Margin .............................................................. $2340
Operating Expenses:
Advertising ......................................................... $600
Sales Salaries ...................................................... 500
Sales Commissions ............................................. 220
Designer’s Salaries ............................................. 400
Other (general and admin. costs )........................ 600
Total operating expense .......................................... 2320
Net operating profit (loss) before taxes ..............................................
$20
Measuring Product Profitability
Need to Distinguish Between:
Variable costs
Fixed Costs
– direct or tracable
– indirect or nontracable
LINKSTER INC: Contribution Margin Statement
Sales ............................................................................................................ $4640
Less variable cost of goods sold (Labor, materials, etc.) ............. 1620
Gross Profit Margin ...................................................................... $3020
Less other variable selling costs (sales commissions) ................. 220
Variable contribution margin ...................................................................... $2800
Fixed costs:
Advertising ................................................................. $600
Sales salaries .............................................................. 500
Fixed production costs ............................................... 680
Designer’s salaries ..................................................... 400
General and administrative overhead ......................... 600
Total operating expense ................................................. 2780
Net operating profit before taxes ................................................................. $ 20
LINKSTER INC: Contribution by Product Line
Sales
Variable cost of goods sold
Gross Profit Margin
Other variable costs
Variable contribution margin
Company
Total
$4640
1620
$3020
220
$2800
Umbrellas
$840
400
$440
40
$400
Sweaters
$2400
800
$1600
120
$1480
Jackets
$1200
380
$ 820
60
$ 760
Cap
$200
40
$160
0
$160
Direct, traceable fixed costs:
Sales salaries
Designer’s salaries
Fixed production costs
Advertising of product lines
Total
Total Contribution
$ 500
400
680
300
$1880
$ 920
$ 20
0
100
40
$160
$240
$ 360
300
340
200
$1200
$ 280
$ 120
100
230
60
$ 510
$ 250
$ 0
0
10
0
$ 10
$150
Indirect, nontraceable fixed costs:
Institutional advertising
General and admin. overhead
Total
Net Operating Profit
$ 300
900
$1200
$ 20
LINKSTER INC: Percentage Variable Contribution Margins
Umbrellas
Number of customers
28,000
Average price paid
$30
Variable Cost per Unit
$15.71
Variable Contribution Margin
per Unit
(Average price - Variable cost) $14.29
PVCM = (Price - VC)
Price
47.6%
Sweaters
40,000
$60
$23.00
$37.00
61.6%
Jackets
Caps
20,000
50,000
$60
$4
$22.00 $0.80
$38.00
63.3%
$3.20
80%
Cost-Volume-Profit Relationships
Economies of Scale
Experience Curve Effect
Economies of Scale for Sweaters
Annual sales volume
40,000 units 80,000 units
Unit variable cost
Multiplied by volume
Total variable cost
Plus: Total direct fixed cost
Total Direct Cost
Divided by Volume
$
23
40,000
$ 920,000
$1,200,000
$2,120,000
40,000
$
Average Unit Cost
$
$
53
23
80,000
$1,840,000
$1,200.000
$3,014,000
80,000
38
The Direct Approach to Marketing
Budgets
1. Develop an industry sales forecast
2. Estimate the market share that will result from
a given price and marketing expenditure level
3. Calculate expected company sales (Market share
X Industry Sales Forecast)
4. Calculate variable contribution (Company Sales
X Percentage Contribution Margin)
5. Calculate total net contribution (Variable Contribution
Margin less Direct Fixed Costs)
6. Determine whether sales, market share and total
contribution levels are acceptable
LINKSTER INC: Projected Profitability for Jackets
Current
Year Projected
Sales
X PVCM
Variable Contribution Margin
$1200
.6333
$ 760
$1500
.6333
$ 950
Direct, traceable fixed costs:
Sales salaries
$120
$120
Advertising
60
160
Design
100
100
Fixed production
230
230
Total, direct traceable
$ 510
$ 610
Total Contribution
$ 250
$ 340
Productivity Analysis
Analysis of Historical Relationships
Competitive Parity Analysis
Market Experiments
Judgment-Based Productivity Estimates
Cross-Elasticity Effects
Judgment-Based Productivity Estimates
What level of expenditure is needed to maintain
current market share?
What minimum level of market share will result if
expenditures are reduced to Zero?
What level of market share will result if expenditures
are increased by 50%?
What is the maximum market share that could be
obtained if expenditures were unlimited?
Judgment-Based Productivity Estimates
Market
Share
(Max) 15
(Plus fifty) 13
(Current) 10
(Min) 5
1.5
2.0
3.0
Advertising
(Million $)
Cross-Elasticity Effects
Substitution Effects
Complementary Effects
Related Use
Enhanced Value
Convenience
LINKSTER INC: Projected Budget with CrossElasticity Effects
Projected Total
Unit Sales
Dollar Sales
Total Contribution
Projected Change
25,000
$1,500,000
$340,000
Plus 5000
Plus $300,000
Plus $90,000
Plus complementary effects:
Cap sales
(5000 X 10% X $4)
X PVCM
$2,000
80%
Plus $1,600
Umbrella sales
(5000 X 30% X $30)
X PVCM
$45,000
47.60%
Plus $21,420
Minus substution effects:
Sweater sales
(5000 X 10% X $60)
X PVCM
Net Change In Total Contribution
Minus $18,460
Plus $94,540