Lecture Managerial accounting for managers (4e) - Appendix B: Profitability analysis - TRƯỜNG CÁN BỘ QUẢN LÝ GIÁO DỤC THÀNH PHỐ HỒ CHÍ MINH

<span class='text_page_counter'>(1)</span><div class='page_container' data-page=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

<i>Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.</i>

Profitability Analysis

</div>
<span class='text_page_counter'>(2)</span><div class='page_container' data-page=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 <i>adding or droppingadding or dropping</i>
a particular segment such as a product or

a particular segment such as a product or

customer – without making any other changes.

</div>
<span class='text_page_counter'>(3)</span><div class='page_container' data-page=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

</div>
<span class='text_page_counter'>(4)</span><div class='page_container' data-page=4>

Learning Objective B-1

<b>Compute the profitability </b>

<b>index and use it to select </b>

</div>
<span class='text_page_counter'>(5)</span><div class='page_container' data-page=5>

Relative Profitability

<i>Relative profitability</i> is concerned with <i>ranking</i>

products, customers, and other business segments
to determine which should be emphasized in an

</div>
<span class='text_page_counter'>(6)</span><div class='page_container' data-page=6>

Relative Profitability

Managers are interested in ranking segments if a
constraint forces them to make <i>trade-offs</i> 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 <i>trade-offs</i> among

segments.

</div>
<span class='text_page_counter'>(7)</span><div class='page_container' data-page=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.

</div>
<span class='text_page_counter'>(8)</span><div class='page_container' data-page=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:

</div>
<span class='text_page_counter'>(9)</span><div class='page_container' data-page=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.

</div>
<span class='text_page_counter'>(10)</span><div class='page_container' data-page=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.

</div>

<!--links-->