Relative ProfitabilityProfitability index Incremental profit from the segment Amount of the constrained resources required by the segment = Incremental profit from the segment is the abs
Trang 1Profitability Analysis
Appendix B
Trang 2Absolute Profitability
Absolute 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
Trang 3Computing Absolute Profitability
For an Existing Segment Compare the revenues that would be lost from
dropping that segment to the costs that
would be avoided
For an Existing Segment Compare the revenues that would be lost from
dropping that segment to the costs that
would be avoided
For a New Segment Compare the additional revenues from adding
that segment to the costs that would be incurred
For a New Segment Compare the additional revenues from adding
that segment to the costs that would be incurred
Trang 4Relative Profitability
Relative profitability is concerned with ranking
products, customers, and other business segments
to determine which should be emphasized in an
environment of scarce resources
Trang 5Relative Profitability
Managers 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
Managers 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
Trang 6Relative Profitability
Profitability
index
Incremental profit from the segment
Amount of the constrained resources required by the segment
=
Incremental profit from the segment is the absolute profitability of the segment
Incremental profit from the segment is the absolute profitability of the segment
Trang 7Profitability Index
Management of Matrix, Inc developed the following
information concerning its two segments:
Management of Matrix, Inc developed the following
information concerning its two segments:
Segment A Segment B
Incremental profit $ 100,000 $ 200,000 Amount of constrained resource required 100 hours 400 hours
Profitability index $ 1,000 $ 500
Trang 8Project Profitability Index
Project
profitability
index
Net present value of the project
Amount of investment required by the project
=
The project profitability index is used when a company has more long-term projects
with positive net present values than it can fund
The project profitability index is used when a company has more long-term projects
with positive net present values than it can fund
From Chapter 14
Trang 9Project Profitability Index
The net present value of the project goes in the numerator since it represents
the incremental profit from the segment
The net present value of the project goes in the numerator since it represents
the incremental profit from the segment
Project
profitability
index
Net present value of the project
Amount of investment required by the project
=
From Chapter 14
Trang 10Project Profitability Index
The investment funds are the constraint, so the amount of investment required by a project goes in the denominator
The investment funds are the constraint, so the amount of investment required by a project goes in the denominator
Project
profitability
index
Net present value of the project
Amount of investment required by the project
=
From Chapter 14
Trang 11Incremental Profit
Constrained Resource Required
100 hours
Profitability Index
Quality Kitchen Design – An Example
Trang 12Incremental Profit
Constrained Resource Required
100 hours
Profitability Index
Quality Kitchen Design – An Example
If management only has 46 hours available,
which projects should
be accepted?
Trang 13Ranking Based on Profitability Index
The optimal profit
Trang 14Volume Trade-Off Decisions
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
Volume trade-off decisions need to be made
when a company must produce less than the
existence of a constraint
Trang 15Volume Trade-Off Decisions
Profitability index
for a volume
trade-off decision
Unit contribution margin Amount of the constrained resource
required 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
Volume trade-off decisions need to be made
when a company must produce less than the
existence of a constraint
Trang 16Pricing New Products
The 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 price
of new
product
Variable cost
of the new product
Opportunity cost per unit of the constrained resource
Amount of the constrained resource required
by a unit of the new product
Trang 17End of Appendix B