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Ebook The essentials of finance and accounting for nonfinancial managers (3rd edition): Part 2

(BQ) Part 2 book "The essentials of finance and accounting for nonfinancial managers" has contents: Analysis of business profitability, return on investment, financing the busines, business planning and the budget, final thoughts. | PA RT Decision Making for Improved Profitability This page intentionally left blank CHAPTER NINE Analysis of Business Profitability T he discussion in this chapter will focus on the factors that determine the profitability of individual products and help us to improve the decisions that we make concerning these products. We will measure and evaluate the factors that determine the profitability of a product, including: ? Product price ? Unit volume sold ? Costs, both fixed and variable ? Profitability The financial tool used to achieve these goals is called breakeven analysis. We begin our discussion by looking at the operating budget for Raritan Manufacturing Company, which is presented in Exhibit 9-1. Raritan has established revenue, spending, and profit targets. 185 186 DECISION MAKING FOR IMPROVED PROFITABILITY Exhibit 9-1. Raritan Manufacturing Company Annual Budget Revenue (10,000 units 05$ ן per unit) $500,000 Costs: Variable Fixed Direct Material Direct Labor Factory Overhead Administration Distribution Total Per Unit Total $ — — 40,000 45,000 50,000 $ 5 10 15 2 3 $ 50,000 100,000 150,000 20,000 30,000 $135,000 $35 $350,000 Operating Profit $485,000 $ 15,000 To Summarize: Revenue מ Variable Costs ($50 )000,01 ן $500,000 ($35 )000,01 ן 000,053 מ ס Gross Profit מ Fixed Costs ($15 )000,01 ן 150,000 000,531 מ Operating Income $ 15,000 Note that the costs are divided into major categories and also separated into their fixed and variable components. Identifying which costs are fixed and which are variable is very valuable for effective decision making. To keep things simple, we will assume that Raritan Manufacturing Company is a one-product business. All of the basic principles of this analysis are equally valid for a multiproduct business. Most of these principles are also applicable to a service business; some of the terminology and processes differ, but conceptually the analyses are the same. The analysis that a