Profit working of Firm

( Distributor)
 Profit working

Profit drivers

P r o f it

minus

S a le s v o lu m e F ix e d
P r ic e
( u n its ) X X c o s ts

Profit = (Volume ( Price- VC))- fixed cost

Contribution margin= Price- VC
Profit = (Contribution margin X Volume) -Fixed costs
 Cost Curves

Fixed and Variable Cost

 Opex

Cost

Volume
 Working capital cost

Cost

Volume
 Variable cost

Variable cost per unit: two situations

INR INR

Total volume produced Total volume produced

Constant variable cost per unit Decreasing variable cost per unit
 Fixed+ Variable Cost

Cost

Volume
 Discussion Point 3

Margin
1.2

Margin
0.8

Margin
0.6

0.4

0.2

0
1 2 3 4 5 6 7 8 9 10 11

Volume
 Analysis of Distributor
Distributor Margin
Margin and Costand Cost Structure
structure

•Distributor margin is a % of turnover – completely variable

•But the Distributor cost has 2 components--- investment and Opex

Investment component Nature of cost Opex Nature of cost

Investment in stock
Component
Rental Related to turnover. low ratio and not
proportionate to turnover. Distributor can
Directly variable with Turnover reduce it further by adding other business
lines

Investment in Market Credit
Investment in Capex
Directly variable with Turnover
Tenuously Linked to turnover.
Significantly lower than
proportionate
Manpower Related to turnover. low ratio and not
proportionate to turnover.
Office overheads Not related to turnover
Market coverage Related to turnover. low ratio and not
opex proportionate to turnover.

Working capital for Opex
Function of Opex and is
therefore both a low ratio and
not proportionate to turnover.
( Not factored in BSL working
in this example)
Depreciation Tenuously Linked to turnover. Significantly
lower than proportionate
Claims Tenuously Linked to turnover. To be
reimbursed but there can be some loss
Bad debts Tenuously Linked to turnover.
 Analysis of Distributor Margin and Cost Structure
Concept of Break -even

Break-Even Point: That volume of sales where we are recovering Fixed Costs
• BE= Fixed Cost/ ( Price – DVC)

• Derive Volume for a given price

•Derive Price for a given volume

• Derive incremental volume or price for incremental advertising

 Discussion Point 3

Cost/ Margin

Volume
Break even volume= Fixed cost/contribution margin per unit
THANK YOU

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