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Product Profitability

Product Profitability

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Categories:Business/Law, Finance
Published by: samzzzzz on Aug 28, 2009
Copyright:Attribution Non-commercial

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01/25/2012

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Product Profitability
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. Typically avery small percentage of your firm’s best products account for a large portion of your net profits. Conversely, a small percentage of your products usually cost more to offer thanthe revenue they deliver. These unprofitable products detract from overall firm profitability. Profit winners and profit losers are a natural consequence of the variabilityin the revenues and the true costs related to certain products. With product profitabilityinsight, you benefit from knowing exactly which products create value, which destroyvalue and why.Today companies can analyze the direct profitability of a discrete product and its bottomline contributions through indirect measures. For example, they can view the profitgenerated through sales of complementary items market basket profitability. Theanalysis of market basket profitability is an important aspect of developing an accuratemeasure of products profitability. It is also part of adopting a holistic, enterprise wide andlife cycle view of products. This type of analysis is cutting edge, and many companies areonly beginning to adopt it. Here are the basic steps to take
 NEED FOR ACCURATE PRODUCT COSTING:
Companies need to know exactly what goes in to the cost of a product so that they cananswer thee following questions when reviewing the product portfolio.
Which products are worth keeping
Are all product- related cost being past 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 growthBecause direct costing is becoming a thing of the past due to thee increase of thecompanies using value-added processes, which allows them to charge a product for marketing (Products specific marketing ), handling inventory and support in order togauge a product profitability level accurately has become some complex that computer software is actually needed, you cam no longer use traditional methods of standard costaccounting to determine it.
 
HOW TO CALCULATEYOUR PRODUCT ROFITABILITY:-
Product profitability is used to let your company know how profitable a certain productis. You can figure product profitability by multiplying the unit sales volume by the profitmargin of the product. The result will give you the overall profit for the product but tofind its direct product profitability (how much the product makes compared to how muchself space it uses) you need to divide the overall profit by the shelf space that it uses. For ex- if your profit for the product is $2000 and you use 100 cm of shelf space your direct product profitability is $20/cm. while this doesn’t seems that hard to do product profitability can get more complicated if you sell numerous products and it can getcomplex because of all of the different costs that associated with the product, etc.Because of many businesses are using product profitability to determine if they shouldcontinue using a product or to help determine what their better products are, computer software has been created to help you determine product profitability.
WHAT THE SOFTWARE INCLUDES:
Accurately determine product cost and profitability in environments likemanufacturing, distribution, retail and many other types of businesses.
Platform for thee assignment of all related direct, indirect and activity based coststo products, channels, regions and customers.
Provides analysis to let you know which products are profitable and why
Scenario modeling that allows you test out new prices, processes and services before you actually launch the product.
The software also allows you to print a variety of reports. The reports that can be printed with this software are:
Profit and loss statement by product and overall
Product ratings for your executive staffs use
Warranty scores
Operational cost report so you can make improvements as needed
Improvements in Corporate Profitability-
Computer software offers product profitability management solutions that will createhuge improvements in your companys profitability by allowing for more accurate pricing, improved inventory performance( no more cold inventory hanging around for months on end) , perfect product mix and a more effective market planning for your company too follow.

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