Compare the additional revenues from adding that segment to the costs that would be incurred.... Learning Objective B-1.[r]
(1)PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA Charles W Caldwell, D.B.A., CMA Jon A Booker, Ph.D., CPA, CIA Cynthia J Rooney, Ph.D., CPA
Copyright © 2014 by The McGraw-Hill Companies, Inc All rights reserved.
Profitability Analysis
(2)Absolute Profitability
Absolute profitability measures the impact on the
Absolute profitability measures the impact on the
organization’s overall profits of
organization’s overall profits of adding or droppingadding or dropping a particular segment such as a product or
a particular segment such as a product or
customer – without making any other changes
(3)Computing 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
(4)Learning Objective B-1
Compute the profitability
index and use it to select
(5)Relative Profitability
Relative profitability is concerned with ranking
products, customers, and other business segments to determine which should be emphasized in an
(6)Relative 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
(7)Relative Profitability
Profitability index
Incremental profit from the segment Amount of the constrained
resources required by the segment
=
Incremental profit from the segment is
Incremental profit from the segment is
the absolute profitability of the segment
the absolute profitability of the segment Incremental profit from the segment is
Incremental profit from the segment is
the absolute profitability of the segment
(8)Profitability 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:
(9)Project Profitability Index
The project profitability index is used
The project profitability index is used
when a company has more long-term projects
when a company has more long-term projects
with positive net present values than it can fund
with positive net present values than it can fund The project profitability index is used
The project profitability index is used
when a company has more long-term projects
when a company has more long-term projects
with positive net present values than it can fund
(10)Project Profitability Index
The net present value of the project
The net present value of the project
goes in the numerator since it represents
goes in the numerator since it represents
the incremental profit from the segment
the incremental profit from the segment The net present value of the project
The net present value of the project
goes in the numerator since it represents
goes in the numerator since it represents
the incremental profit from the segment