Profitability and Productivity Analysis

Profitability and Productivity AnalysisProductivity Analysis is the assessment of the sales or market share consequences of a marketing strategyProfitability 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 ExpendituresImpact on Profitability StructureExpected Productivityin Terms of SalesProduct ObjectiveIndustry SalesForecastDecision

LINKSTER INC: Profit and Loss StatementSales ................................................................................................... $4640Less cost of goods sold ................................. ...................... 2300Gross Profit Margin .............................................................. $2340

Operating Expenses:Advertising ......................................................... $600Sales Salaries ...................................................... 500Sales Commissions ............................................. 220Designers Salaries ............................................. 400Other (general and admin. costs )........................ 600

Total operating expense .......................................... 2320

Net operating profit (loss) before taxes .............................................. $20

Measuring Product ProfitabilityNeed to Distinguish Between:Variable costs Fixed Costsdirect or tracableindirect or nontracable

LINKSTER INC: Contribution Margin StatementSales ............................................................................................................ $4640Less variable cost of goods sold (Labor, materials, etc.) ............. 1620Gross Profit Margin ...................................................................... $3020Less other variable selling costs (sales commissions) ................. 220Variable contribution margin ...................................................................... $2800

Fixed costs:Advertising ................................................................. $600Sales salaries .............................................................. 500Fixed production costs ............................................... 680Designers salaries ..................................................... 400General and administrative overhead ......................... 600Total operating expense ................................................. 2780

Net operating profit before taxes ................................................................. $ 20

Company TotalUmbrellasSweatersJacketsCapSales$4640$840$2400$1200$200Variable cost of goods sold 1620 400 800 380 40Gross Profit Margin$3020$440$1600$ 820$160Other variable costs 220 40 120 60 0Variable contribution margin$2800$400$1480$ 760$160

Direct, traceable fixed costs:Sales salaries$ 500$ 20$ 360 $ 120$ 0Designers salaries 400 0 300 100 0Fixed production costs 680 100 340 230 10Advertising of product lines 300 40 200 60 0Total$1880$160$1200$ 510$ 10Total Contribution$ 920$240$ 280$ 250$150

Indirect, nontraceable fixed costs:Institutional advertising$ 300General and admin. overhead 900 Total$1200Net Operating Profit$ 20

LINKSTER INC: Contribution by Product Line

LINKSTER INC: Percentage Variable Contribution Margins UmbrellasSweaters JacketsCaps

Number of customers 28,00040,000 20,00050,000Average price paid $30$60$60 $4Variable Cost per Unit $15.71$23.00$22.00 $0.80Variable 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

Cost-Volume-Profit RelationshipsEconomies of ScaleExperience Curve Effect

Economies of Scale for Sweaters Annual sales volume 40,000 units80,000 units

Unit variable cost $ 23$ 23Multiplied by volume 40,000 80,000 Total variable cost$ 920,000 $1,840,000Plus: Total direct fixed cost$1,200,000$1,200.000Total Direct Cost$2,120,000$3,014,000Divided by Volume 40,000 80,000

Average Unit Cost$ 53$ 38

The Direct Approach to Marketing Budgets1. Develop an industry sales forecast2. Estimate the market share that will result from a given price and marketing expenditure level3. Calculate expected company sales (Market shareX Industry Sales Forecast)4. Calculate variable contribution (Company SalesX Percentage Contribution Margin)5. Calculate total net contribution (Variable ContributionMargin less Direct Fixed Costs)6. Determine whether sales, market share and total contribution levels are acceptable

LINKSTER INC: Projected Profitability for JacketsCurrent Year Projected

Sales$1200$1500X PVCM .6333 .6333Variable Contribution Margin$ 760$ 950

Direct, traceable fixed costs:Sales salaries$120$120Advertising 60 160Design 100 100Fixed production 230 230Total, direct traceable $ 510$ 610Total Contribution$ 250$ 340

Productivity AnalysisAnalysis of Historical RelationshipsCompetitive Parity AnalysisMarket ExperimentsJudgment-Based Productivity EstimatesCross-Elasticity Effects

Judgment-Based Productivity EstimatesWhat 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 EstimatesMarket ShareAdvertising(Million $)(Max) 15(Plus fifty) 13(Current) 10(Min) 52.01.53.0

Cross-Elasticity EffectsSubstitution EffectsComplementary EffectsRelated UseEnhanced ValueConvenience

LINKSTER INC: Projected Budget with Cross-Elasticity Effects

Chart1

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Effect of New BudgetEffect of New BudgetEffect of New BudgetEffect of New BudgetEffect of New BudgetEffect of New Budget

0000

Unit Sales

Dollar Sales

Total Contribution

Sheet1

Effect of New Budget

Projected TotalProjected Change

Unit Sales25,000Plus 5000

Dollar Sales$1,500,000Plus $300,000

Total Contribution$340,000Plus $90,000

Plus complementary effects:

Cap sales

(5000 X 10% X $4)$2,000

X PVCM80%Plus $1,600

Umbrella sales

(5000 X 30% X $30)$45,000

X PVCM47.60%Plus $21,420

Minus substution effects:

Sweater sales

(5000 X 10% X $60)

X PVCMMinus $18,460

Net Change In Total ContributionPlus $94,540