Profitability Analysis
PROFITABILITY ANALYSIS
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Introduction
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Profit
o
Means the compensation received by a firm for
its managerial function
o
Can be looked as a reward for true entrepreneurial
function
o
Is the reward earned by the entrepreneur for
nearing the risk
·
Profit Analysis
o
Is a form of cost accounting used for
elementary instruction and short run decisions
o
Widens the use of info provided by breakeven
analysis
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Help to find out the Breakeven point where
§ Total revenue = Total cost
Applications,
Method, Limitations and Policies of Profit Analysis
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Applications
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To calculate the breakeven analysis
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To calculate the target income sales
o
To analyze the short run trade-offs in
operational decisions
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Method
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Profit Volume Ratio
§ This is calculated by dividing the shareholders
contribution by the sales and then multiplying it by 100 as follows
§ PVR =
(SC/Sales)*100
§ Here
· PVR = Profit Volume Ration
· SC= Shareholders Contribution
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Limitations
o
Short run
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Presumes the unit variable costs and the unit
revenues to be constant
o
Presumes a neat division between variable
costs and fixed costs
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Policies
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Industry Leadership
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Restricting the Entry
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Political Impact
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Consumer Goodwill
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Wage Consideration
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Liquidity Preference
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Avoid Risk
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Description
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