Incremental Profitability

Molly Pisasale and Mary Serra

Incremental Profitability - Definition
Incremental profit is the profit gain/loss associated with a given managerial decision.
Total profit increases so long as incremental profit is positive, when incremental
profit is negative, total profit declines.

Incremental Profit is a comparison of

estimated incremental (marginal) revenue with the
estimated incremental cost of a proposed investment or action,
to determine the incremental profit estimated to be generated.

Example:
Holden has refused to sublet excess space for $5,000 per month because it figures its cost as $7,500 per month -a price paid for a long-term lease on the
facility.

If the space represents excess capacity with no current value to the company, its historical cost of $7,500 per month is irrelevant and should be
disregarded.

Holden is foregoing $5,000 in profits by turning down the offer to sublet the excess space.

Similarly, any firm that adds a standard allocated charge for fixed costs and overhead to the true incremental cost of production runs the risk of turning
down profitable business.
 Incremental Profitability
Wholesales (units) = 95,458
Net Sales ($M) = 2,134

Variable Profit = 331m

Locally Incurred Expenses = 220m
102 CI/SP
42 Administraive
38 Sell/Marketing
(1) Other SG&A
1 Compensation Plan
38 P&A Warehousing
NSC Operating Profit = 111m
Standard Allocations = 261m
Operating Incremental
Revenue Revenue & Operating Profit Allocated Incremental Expense -
Expense incurred relating to vehicles
Expense incurred relating before Global Allocations = sold at GM Holden
to vehicles sold at GM
Holden (151)m
Global Allocations = 154m

COS EBIT = (308)m Not Incremental Expense -

Fixed Expense incurred
irrespective of GM Holden
NSC Operating Model
CIO Regional Summary NSC Region Total COS Owner
Wholesales (000) MDs
Gross Sales MDs
Sales Allowance MDs
Net Sales MDs NSCs need to understand FX impacts on imported
Material Johnny Saldanha
Freight Johnny Saldanha
Policy & Warranty Bob Ottolini
vehicles
Campaigns Bob Ottolini
Variable Manufacturing James De Luca
Variable Profit MDs
Variable Profit % MDs
Local Expense
CIB / SP MDs
Administrative MDs Locally controlled NSC expenses before allocation
Sell/Marketing MDs
Other SG&A MDs
NSC Operating Profit MDs
NSC Operating Margin % MDs NSC Accountability for OP
Not Controlled
Engineering Steve Clarke
Fixed Manufacturing James DeLuca
Mfg. Depreciation James DeLuca
Special Tools (Vendor) Region
FX (on Balance Sheet) Region
Job Security (Seperations) Region / MDs Includes allocations as part of CoS i.e. full
IP Amotization Region
Tooling Impairment Region
Administrative (Allocated) MDs / Region Corporate cost allocation
Sell/Marketing (Allocated) MDs / Region Including incremental & non-incremental
Other Non-Operating Income Region
Equity Income Bob Socia allocations
Minority Interest Region
EBIT (Adjusted) Region
EBIT (ADJ.) % Region Fully Allocated results in the Country of Sales
 Incremental Profitability Key Financials

Current Vs Budget
$M Q1 Q2 Q3 Q4 CY Q1 CY
Wholesales (Units) 20,029 23,957 26,593 24,878 95,458 (1,823) (5,720)
Net Sales 487 526 585 536 2,134 20 3
Variable Profit 62 74 103 91 331 (6) 60
Operating Incremental
Variable Profit % 12.8% 14.1% 17.6% 17.0% 15.5% (0.3)pp 21.5 pp Revenue Revenue &
CI/SP (Local) 21 26 30 25 102 4 (3) Expense incurred relating to
vehicles sold at GM Holden
Other Local Costs 21 33 34 29 118 2 (11)
NSC Operating Profit 20 15 39 37 111 0 46
NSC Operating Margin % 4.0% 2.9% 6.7% 6.9% 5.2% 0.0 pp 16.5 pp
NET Profit/Loss Allocated Incremental Expense
Subtotal - Standard Allocations 43 70 80 69 261 17 (42) - Expense incurred relating to
relating to GM
Holden vehicles sold at GM Holden
Operating Profit Before Global Allocations (23) (55) (40) (32) (151) 18 3
2020 to reach
Profit Operating Profit Before Global Allocations % (4.8%) (10.4%) (6.9%) (6.0%) (7.1%) 0.9 pp 1.2 pp

Subtotal - Global Allocations 39 39 39 38 154 (0) 1

Not Incremental Expense -
COS EBIT (62) (94) (80) (71) (308) 19 5 Fixed Expense incurred
irrespective of GM Holden
Country of Sale EBIT% (12.7%) (18.0%) (13.7%) (13.3%) (14.4%) 0.9 pp 1.9 pp
including Corp
non-incremental
expense EBITR (51) (83) (69) (52) (254) 25 (2)