Appendix B
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
AppB-2
Absolute Profitability
Absolute profitability measures the impact on the
organizations overall profits of adding or dropping
a particular segment such as a product or
customer without making any other changes.
AppB-3
AppB-4
Relative Profitability
Relative profitability is concerned with ranking
products, customers, and other business segments
to determine which should be emphasized in an
environment of scarce resources.
AppB-5
Relative Profitability
Managers
Managers are
are interested in
in ranking
ranking segments
segments ifif aa
constraint
constraint forces
forces them
them to
to make
make trade-offs
trade-offs among
among
segments.
segments.
In
In the
the absence
absence of
of aa constraint,
constraint, all
all segments
segments that
that are
are
absolutely
absolutely profitable should be pursued.
AppB-6
Relative Profitability
Incremental
Incremental profit
segment is
is
profit from
from the
the segment
the
the absolute
absolute profitability
profitability of
of the
the segment.
segment.
AppB-7
Project
profitability
index
The
project profitability
profitability index
index is
is used
used
The project
when
when aa company
company has
has more
long-term projects
projects
more long-term
with
with positive
positive net
net present
present values
values than
than itit can
can fund.
fund.
AppB-8
Profitability index
for a volume =
trade-off decision
AppB-9
AppB-10
AppB-11
Most
Most profitable
profitable
Next
Next most
most
profitable
profitable
AppB-12
AppB-13
RX200
$
15
200
$ 3,000
Products
VB30
$
10
400
$ 4,000
SQ500
$
16
100
$ 1,600
AppB-14
Variable cost
of the new +
product
Amount of the
Opportunity cost
constrained
per unit of the
resource required
constrained
by a unit of the
resource
new product
AppB-15
End of Appendix B