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

Product
New Old
Quadrant 3
Quadrant 1
Old Product
New

Minimum 25%
1 3 in New Market
Market
Old

2 4 Quadrant 4
Quadrant 2 Old Product
New Product in in Old
Old Market Market
 PROFITABILITY CONTROL
PRODUCT PERFORMANCE EVALUTION
Returns Margins Matrix

Return
Quadrant 1 High Low Quadrant 3
Satisfactory Situation Sell More, Manage
High

Retain Product Mix Assets better.

1 3 Turn and Earn
Margin

Quadrant 2 Quadrant 4
Low

Cut costs, adjust price. 2 4 Product needs a through

Entire dependence of check up. Long term solution
price can be detrimental or phase out products
Marketing Organisations Should Aim For Maximum Products in Quadrant 1
and Minimum in Quadrant 4
 PROFITABILITY CONTROL
PRODUCT PERFORMANCE EVALUTION
PLC- Industry vis-à-vis Firm
New Product Launch

INDUSTRY
Quadrant 1 Quadrant 3
Industry Launch, Industry Growth,
Company Launch Introdu- Growth Company Launch
COMPANY

Leadership Status ction Good, Be Careful

Quadrant 4
Quadrant 2
Industry decline, Company
Industry Maturity, Maturity Decline
Launch, Problems
Company Launch
Be Careful, Danger?

Useful Guide for New Product Launch

Not a Financial Guideline
 PROFITABILITY CONTROL
PRODUCTWISE 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 in
Identifying most profitable products, so that more
sales can be planned and attempted
Allocation of funds for future investments among
product divisions
Maintaining close control over cost. Knowledge of
incidence of cost helps in cost control
 PROFITABILITY CONTROL
PRODUCTWISE 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 earned
Absorption 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 CONTROL
PRODUCTWISE PROFITABILITY ANALYSIS
MNC Ltd decided to analyse its selling and distribution cost for
products A,B and C and arrive productwise profit or loss figures
Sales Rs. 520,000
Cost of Goods Sold Rs. 250,000
Gross Profit on Sales Rs. 270,000
Selling and Distribution Costs in Rs.
Salesman’s Salaries 24,500
Salesman’s Commission 27,500
Sales Office Expenses 14,800
Advertising 65,000
Warehouse 4,500
Packing and Shipping 5,600
Transportation and Delivery 8,400
Credit and Collection 4,100
Bad Debts 9,410
TOTAL 163, 810
General and Administrative Expenses 41,250 Rs. 205,060
Net Profit Rs. 64,940
 PROFITABILITY CONTROL
PRODUCTWISE 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 CONTROL
PRODUCTWISE PROFITABILITY ANALYSIS
Products
Particulars Basis of Allocation Total Rs.
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 CONTROL
MARKETING COST ANALYSIS
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

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
Total543,920
 PROFITABILITY CONTROL
MARKETING COST ANALYSIS
The following data is also available

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

Calculate Marketing Cost per unit sold for each of the three sizes
Calculate Marketing Cost as percentage to Sales Turnover
 PROFITABILITY CONTROL
MARKETING COST ANALYSIS
Size
Expenses Basis of Allocation Total Rs.
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 CONTROL
MARGINAL COSTING
Technique of segregating Fixed and Variable
Costs
Arriving with a cost that would vary in proportion to
Production and Sales
Marginal Costing is opposite to Absorption Costing
Fixed Costs tend to be unaffected by variation in
volume of production
Variable Costs tend to vary directly by variation in
volume of production
Distinction should be made between Marginal Cost
of production and Marginal Cost of sales
 PROFITABILITY CONTROL
MARGINAL COSTING
Contribution – Difference between Sales Volume
and Marginal Cost of Sales (Total Variable Cost)
Represents amount contributed towards Fixed
Cost and Profits
C = SV – MC
or C + MC = SV
Also C = P + FC
or C – P = FC
or C – FC = P
Also SV – MC = P + FC
or P = SV – MC – FC
 PROFITABILITY CONTROL
COST & PROFIT UNDER MARGINAL COSTING
CPU in Rs.
i Direct Material 40
ii Variable Cost of Direct Labour 3
iii Direct Expenses (Variable) 3
iv Variable OH
Factory 3
Office & Admin 1
Selling & Dist 5 9
v Marginal Cost of Sales (i to iv) 55
vi Selling Price 100
vii Contribution per unit (vi – v) 45
Total Contribution on 1 lac units sold Rs. 45 Lacs
Total Fixed Cost Rs. 25 Lacs
Total ProfitRs. 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 CONTROL
COST & 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 CONTROL
COST & PROFIT UNDER MARGINAL COSTING
Examine 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 CONTROL
COST & PROFIT UNDER MARGINAL COSTING
Examine 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 CONTROL
COST & PROFIT UNDER MARGINAL COSTING
Favourable 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 CONTROL
MARGINAL COSTING BASIS FOR OPTIMUM
PRODUCT MIX
Two 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 CONTROL
MARGINAL COSTING BASIS FOR OPTIMUM
PRODUCT MIX
Comment 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 factor
Assuming 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 CONTROL
MARGINAL 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 CONTROL
MARGINAL 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 Basis of Ranking
products
Sales Volume B A Unit Contribution
Sales Value / Sales Price B A C/S Ratio
RM A B Contribution per kg RM
Production Capacity B A Contribution per machine
(Machine Hours) hour
 PROFITABILITY CONTROL
MARGINAL 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 Total RM used in
kg kg
A 3,500 2 7,000
B 1,000 3 3,000
Total 10,000
 PROFITABILITY CONTROL
PRODUCTWISE PROFITABILITY ANALYSIS
MNC Ltd decided to analyse its selling and distribution cost for
products A,B and C and arrive productwise profit or loss figures
Sales Rs. 520,000
Cost of Goods Sold Rs. 250,000
Gross Profit on Sales Rs. 270,000
Selling and Distribution Costs in Rs.
Salesman’s Salaries 24,500
Salesman’s Commission 27,500
Sales Office Expenses 14,800
Advertising 65,000
Warehouse 4,500
Packing and Shipping 5,600
Transportation and Delivery 8,400
Credit and Collection 4,100
Bad Debts 9,410
TOTAL 163, 810
General and Administrative Expenses 41,250 Rs. 205,060
Net Profit Rs. 64,940
 PROFITABILITY CONTROL
PRODUCTWISE 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
Salesman'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
What is the difference between Sales Analysis and Marketing Cost
Analysis?
How can this help in business?
 PROFITABILITY CONTROL
A 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
Direct Selling Costs for March 0X
Selling Cost Mumbai Nagpur Pune
Directly
Chargeable 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
 PROFITABILITY CONTROL
Indirect Selling Costs for March 0X

Indirect Selling Costs Basis of Distribution

Executive Office 12,000 Equally among Territories
Service Dept. Cost 15,000 & Lines of Products
Other 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?