ba 315 chapter 6 ppt 2

8/7/2019 BA 315 CHAPTER 6 PPT 2

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Profitability

Analysis

Presented by:-Deepak Girhe

Guided by: prof.Jain

8/7/2019 BA 315 CHAPTER 6 PPT 2


Profitability analysis is

the assessment of the

impact of variousmarketing strategies and

programs on the profit

contribution that can beexpected from a product or

product line.

�Variable costs vary with salesvolume, whereas fixed costs

remain the same regardless ofvolume levels.

8/7/2019 BA 315 CHAPTER 6 PPT 2


The percentage

variable contribution

margin indicates the

percentage of each

additional salesdollar that will he

available to help the

firm cover its fixed

costs and

increase profits.

8/7/2019 BA 315 CHAPTER 6 PPT 2


Direct fixed costs

are incurred by a

specific product or

service; indirect

fixed costs, areincurred to support

the

total business.

8/7/2019 BA 315 CHAPTER 6 PPT 2


Indirect costs can be

broken into two

categories:

�1. Traceable costs are indirect

costs that can be±allocated to various productssome nonarbitrary

±basis.

�2. Nontraceable costs are not

assigned to individual

� roducts.

8/7/2019 BA 315 CHAPTER 6 PPT 2


Fixed and variablecost identification

allows managers toexamine some of the

profitability

implications of pricingand marketing

expenditure decisions

on cost volume profitrelationships and its

implications for

marketing budgets.

8/7/2019 BA 315 CHAPTER 6 PPT 2


Economies of

scale exist when alarge portion of

total

operating costs arefixed and large

changes in volume

result insignificant changes

in average cost per

product.

8/7/2019 BA 315 CHAPTER 6 PPT 2


M any firms employ

minimal fixed cost

strategies, potential

negative

consequence economies of

scale.

As a firm becomes moreexperienced in producing a

product, variable costs

decrease as volumeincreases.

Phenomenon is

"experience curve

effect."

8/7/2019 BA 315 CHAPTER 6 PPT 2


Semifixed (stepped)

costs�Semifixed costs are coststhat don't vary automatically

±on a per unit basis, but

may change if substantial±decreases in volume takeplace. Increased demand

will

±result in average costsincreasing temporarily if astep

±up in certain fixed costs

is necessary.

8/7/2019 BA 315 CHAPTER 6 PPT 2


Retailers are

interested physical

assets and inventory

investment.

�Inventory turnover isthe ratio of a product'ssales to the average

dollar value of theinventory held for thatproduct.

8/7/2019 BA 315 CHAPTER 6 PPT 2


Retailers are

interested physical


investment.

�Sales per square foot

is the ratio of a

product's sales to the

amount of selling

space.

8/7/2019 BA 315 CHAPTER 6 PPT 2


Retailers are

interested physical


investment.

�Gross margin return oninventory investment

measures the profit

return rather than thesales return on

inventory investment.

8/7/2019 BA 315 CHAPTER 6 PPT 2


Retailers are

interested physical


investment.

�Gross margin per square

foot is equivalent to

sales per square foot

multiplied by percentage

gross profit margin.

8/7/2019 BA 315 CHAPTER 6 PPT 2


managers must have an

understanding of

product objectives and industry sales

forecasts to develop a

budget. The budgeting

process can proceed in

either of two ways:

direct approach

indirect approach

8/7/2019 BA 315 CHAPTER 6 PPT 2


direct approach

indirect approachW ith the direct

approach, managers.make specific

estimates of the

sales that willresult from a given

price and marketing

bud et

ba 315 chapter 6 ppt 2

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