 |
| Corporate practice bd |
What is profitability analysis?
Profitability analysis can be defined a
component of enterprise resource planning(ERP) and helps managers would like
to know the profitability of their
products, customers, and others business segments .They want this information
so that they know what segments to drop and
add which to emphasize.
01. Absolute profitability:
Absolute profitability is concerned with the impact on the organizations overall profit of adding or dropping a particular segment such as a product or customers- without making any other changes.
02. Relative profitability:
On the other hand, relative profitability a manager is often want to know which segments are most and least profitable. Relative profitability is concerned with ranking products, customers, and other business segments to determine which should be emphasized.
Importance of Profitability Analysis
01. Profitability analysis can help key personnel in an enterprise to:
02. Identify the foremost and least profitable clients.
03. Identify the foremost and least profitable products or services.
04. Discover which sources informative data offer the foremost reliable
facts.
05. Optimize responses to changing customer needs.
6. Evolve the merchandise mix to maximize profits within the medium and future.
07. Isolate and remedy the causes of decreasing profit margins.
A
customer profitability profile highlights those customers who should be dropped
to boost profitability do you Agree
?explain
Ans;
No. A customer profitability profile highlights differences within the current period's profitability across
customers.
Why do some firms measure customer
profitability? In what situation would a firm not want to live customer profitability? (CMA-Dec-2019)
Ans:
Some firm may measure customer profitability when groups of consumers differ
within the quantity and price of
services provided. A firm wouldn't have an interest within the measuring
customer profitability if all customers receive the identical services at the
identical cost.
Let’s start to know profitability Index, as we can see,
01. Profitability Index = (Incremental profit from segment / Constraints resource of Segments)
02. Project Profitability Index = (Net present value of the project / Amount of investment required by the project)
02. Profitability Index for a Volume trade –off decision = (Unit contribution margin/ Amount of constrained resource required by the one unit.
Let,s start with Practical Example - (CMA-June-2021)
Practical Example. (01) (Try yourself).
The wimax company LTD has two customers that purchase a variety of products from the company .
Customers
Kamal Jamal
Sales Tk.4,50,000.000 TK.4,00,000.000
COG TK.1,80,000.000 TK.80,000.000
(Marketing,Sales
& distribution expense
inducing sales commission ) Tk.3,20,00.000 TK.65,000.000
Required:
01.Which customer is more profitable for the company?
02. Compare a sales incentive scheme that pays 2% sales revenue to an incentive scheme that pays 4% of customer profit. How will each scheme affect sales persons desire to increase sales to each customer.