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
Designers 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
Designers 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
Designers 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
Annualsales
salesvolume
volume
40,000
40,000units
units 80,000
80,000units
units
Unit
Unitvariable
variablecost
cost
Multiplied
Multipliedby
byvolume
volume
Total
Totalvariable
variablecost
cost
Plus:
Plus:Total
Totaldirect
directfixed
fixedcost
cost
Total
TotalDirect
DirectCost
Cost
Divided
Dividedby
byVolume
Volume

$$

23
23
40,000
40,000
$$ 920,000
920,000
$1,200,000
$1,200,000
$2,120,000
$2,120,000
40,000
40,000

$$

Average
AverageUnit
UnitCost
Cost

$$

$$

53
53

23
23
80,000
80,000
$1,840,000
$1,840,000
$1,200.000
$1,200.000
$3,014,000
$3,014,000
80,000
80,000
38
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

Sales
Sales
XXPVCM
PVCM
Variable
VariableContribution
ContributionMargin
Margin

Current
Current
Year
Year

Projected
Projected

$1200
$1200
.6333
.6333
$$ 760
760

$1500
$1500
.6333
.6333
$$ 950
950

Direct,
Direct,traceable
traceablefixed
fixedcosts:
costs:
Sales
$120
$120
Salessalaries
salaries
$120
$120
Advertising
60
160
Advertising
60
160
Design
100
100
Design
100
100
Fixed
230
230
Fixedproduction
production
230
230
Total,
$$ 510
$$ 610
Total,direct
directtraceable
traceable
510
610
Total
$$ 250
$$ 340
TotalContribution
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