Profitability and Productivity Analysis

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Profitability and Productivity Analysis
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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

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Factors to Consider in Making Marketing
Expenditures
Impact on Profitability Structure
Expected Productivity in Terms of Sales
Decision
Industry Sales Forecast
Product Objective
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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 Designers Salaries .........................
.................... 400 Other (general and
admin. costs )........................
600 Total operating expense ...................
....................... 2320 Net operating
profit (loss) before taxes .......................
....................... 20
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Measuring Product Profitability

• Need to Distinguish Between
• Variable costs
• Fixed Costs
• direct or tracable
• indirect or nontracable

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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 Designers salaries .........................
............................ 400 General and
administrative overhead .........................
600 Total operating expense
.................................................
2780 Net operating profit before taxes
..................................................
............... 20
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LINKSTER INC Contribution by Product Line
Company Total Umbrellas Sweaters Jack
ets Cap Sales 4640 840 2400 1200 200 Vari
able cost of goods sold 1620 400 800
380 40 Gross Profit Margin 3020 440 16
00 820 160 Other variable costs 220
40 120 60 0 Variable
contribution margin 2800 400 1480
760 160 Direct, traceable fixed costs Sales
salaries 500 20 360 120
0 Designers salaries 400 0 300
100 0 Fixed production costs 680
100 340 230 10 Advertising of product
lines 300 40 200 60
0 Total 1880 160 1200 510 10 Total
Contribution 920 240 280
250 150 Indirect, nontraceable fixed
costs Institutional advertising 300 General
and admin. overhead 900 Total 1200 Net
Operating Profit 20
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LINKSTER INC Percentage Variable Contribution
Margins
Umbrellas Sweaters
Jackets Caps Number of customers
28,000 40,000 20,000 50,000 Average
price paid 30 60 60 4 Variable
Cost per Unit 15.71 23.00 22.00
0.80 Variable Contribution Margin per
Unit (Average price - Variable cost)
14.29 37.00 38.00 3.20 PVCM (Price -
VC) 47.6 61.6 63.3 80
Price
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Cost-Volume-Profit Relationships

• Economies of Scale
• Experience Curve Effect

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Economies of Scale for Sweaters
Annual
sales volume 40,000 units 80,000 units
Unit variable cost 23
23 Multiplied by volume 40,000
80,000 Total variable cost
920,000 1,840,000 Plus Total direct fixed
cost 1,200,000 1,200.000 Total Direct
Cost 2,120,000 3,014,000 Divided by Volume
40,000 80,000 Average Unit Cost
53 38
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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
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LINKSTER INC Projected Profitability for
Jackets
Current Year Projected
Sales 1200 1500 X PVCM .6333
.6333 Variable Contribution Margin 760
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
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Productivity Analysis

• Analysis of Historical Relationships
• Competitive Parity Analysis
• Market Experiments
• Judgment-Based Productivity Estimates
• Cross-Elasticity Effects

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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?

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Judgment-Based Productivity Estimates
Market Share
(Max) 15
(Plus fifty) 13
(Current) 10
(Min) 5
Advertising (Million )
2.0
1.5
3.0
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Cross-Elasticity Effects

• Substitution Effects
• Complementary Effects
• Related Use
• Enhanced Value
• Convenience

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LINKSTER INC Projected Budget with
Cross-Elasticity Effects