RAJEEV GANDHI COLLEGE OF MANAGEMENT STUDIES

SUBJECT: MARKETING FINANCE

NAME: PRAKASH RAVINDRAN.

ROLLNO: 39.

TOPIC: PROFITABILITY OF PRODUCTS AND RELATIVE

PROFITABILITY

GUIDED BY: PROF. GHANACHARI

PROFITABILITY OF PRODUCTS AND RELATIVE

PROFITABILITY
Profitability is expressed in terms of several popular numbers, that
measure one of two generic types of performance: "how much they make
with what they have got and how much they make from what they take in”

Profitability controls measures maintained by manufacturers of the level

of profit of their various products, territories, customer groups, distribution
channels, or order sizes.

PROFITABILITY OF PRODUCT:

• Product profitability, simply defined, is the difference between the

revenues earned from, and the total costs associated with, a product
over a specified period of time.

• These are the measures maintained by manufacturers of the level of

profit of their various products, territories, customer groups,
distribution channels, or order sizes.

• Information gained from profitability controls will help the

manufacturer determine whether any products or marketing activities
should be expanded, reduced, or eliminated.

NEED FOR ACCURATE PRODUCT COSTING:

Companies need to know exactly what goes in to the cost of a product so
that they can answer the following questions when reviewing the product
portfolio.

 Which products are worth keeping

 Are all products- related cost being passed on to customers.
 Is product quality an issue
 If we drop a product, will any resources being freed up, if so which
resources
 What new product areas should the business invest in next
 What market should we target for future growth?

Production of which product is more profitable for the company as per the given data.

Product A Product B
 (Cost per unit Rs.)
(Cost per unit Rs.)

i. Direct Materials 40 45

ii. Variable Cost of Direct Labour 3 2

iii. Direct Expenses 3 3

iv. Variable Overheads

Factory 3
4

Office and administration 1 2

Selling and Distribution 5

4

v. Cost of Sales(total variable cost) 55 60

vi. Selling Price 100

110

vii. Contribution per unit 45

50

viii. Total Fixed Cost 25 25

---------------------
-------------------

ix. Profit 20
25

After analyzing we can see product B provides more profit than product A.

Marketing Strategies to Improve Profitability

Marketing Profitability =

Net Marketing Contribution NMC =

Market Demand X Average Selling Price X Channel Discount X percent

margin –Marketing budget.

Relative profitability:

Relative profitability can be defined as comparison of two or more similar

entities in order to evaluate the profitable product amongst them. Relative
market share profit is a little know ratio that offers the investor a comparison
of a company's profitability in relation to its market share. The relative
market share profit calculation is computed by taking the company’s market
share (as a percentage) and multiplying it by its profits.

It can be done only between products that are similar in nature or of same
behavior.

It is mainly performed in organizations so as to identify the profit of a

product in 2 financial years.

It can also be used in banking, finance, marketing, IT, Human resource

sectors.

In today’s time organizations use software’s to perform these operations as it

saves human effort, time period, and provides the information accurately.

Measurements used to assess the relative profitability of a company. Some

common profitability ratios and the formulas for calculating them are as
follows:

* Book value per share = Total common equity divided by the number of
common shares outstanding.

* Dividends per share = Total dividends paid to common shareholders

divided by the number of common shares outstanding.

* Earnings per share = The common shareholders' portion of net income

for a given period divided by the number of common shares outstanding.

* Gross profit percentage = Total cost of sales for a given period divided
by total sales for that period. * Net profit percentage = Net income for a
given period divided by total sales for that period.

* Operating profit percentage = Earnings before interest and taxes for a

given period divided by total sales for that period. * Return on common
equity = Net income for a given period less dividends, divided by
shareholders' equity less preferred stock.

* Return on investment = Net income divided by total asset

For example, assume that a company sells two products. Product A has a
per unit sales price of 120, and Product B has a per unit sales price of 100.
A salesperson, earning a commission calculated as 5% of total sales, would
prefer to sell product A. However, the company is better off when Product B
is sold, because it has a higher contribution impact (30 vs. 20).

Sales Price Fixed Cost Variable Cost

Profit

Product A 120 60 40
20

Product B 100 40 30
30

Since the profit of product B is higher, we select product B for more

investment.