1: Product Profitability Analysis - Exercise

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4 1: Product Profitability Analysis - Exercise PRODUCT TOTAL Filter Bolt Drum PRICE ( ) COST ( ) ANNUAL SALES ( ) 1,440k 1,800k 2,500k 5,740k AVERAGE STOCK ( ) 210k 850k 240k 1,300k 1 Typical conclusion: The Drum Product is the best as it has the highest sales revenue Question: is that conclusion necessarily the correct one given that the gross margin from the Drum product is 20%? -Page 1

5 For the Drum Product (only) 1. Calculate the number of items sold 2. Calculate in the gross profit for this product line 3. Calculate the Cost of Goods Sold 4. Calculate the Stock Turn 5. How many days in a year? 6. Multiply the total days in a year by the Stock Turn 7. Divide the Gross Profit by the Stock Value -Page 2

6 Analysing The Numbers PRODUCT Formula Filter Bolt Drum Total Sales % of total a 1,440k 25% 1,800k 31% 2,500k 44% GM% b 35% 50% 20% 5,740k 100% Gross Profit (GP) % of total c = a x b 500k 25% 900k 48% 500k 27% 1,900k 100% Average price per item d #. of items e = a / d 120k 300k 167k 521 GP per item sold f = c / e Ave. stock on hand % of total g 210k 16% 850k 65% 240k 18% 1,300k 100% Stock turnover (days) (gx365) / (a-c) ROI i = c / g Page 3

7 Interpreting The Analysis The Bolt has the highest GM% (50%) and contributes the most to GP ( 900,000). But, you need to sell 300,000 units to achieve this, compared to 120,000 Filters and 167,000 Drums. Could it be that the Bolts, therefore, generates more costs than either Filters or Drums. Perhaps it does and maybe it should be investigated. The Filters and Drums each produce about 500,000 in GP, but the Filter does that with 120,000 units and the Drum does it with 167,000 units. Perhaps the Drum costs a little more than the Filter to support? The average value of stock tied up in the Bolt is 850,000, and the rate of stock turn is 344 days (i.e., it takes nearly one year to turn the stock over). Therefore, to yield 900,000 gross profit, you require 850,000 in stock an ROI of 1.06%. 4 -Page 4

8 Interpreting The Analysis The Filters stock turn is 82 days and its ROI is 2.38%, which is significantly higher than the Bolts, the star performer in other respects. The Drums have a stock turnover of only 44 days and it yields an ROI of 2.08%, which is not quite as high as the Filters, but certainly a lot better than the Bolts. You should not conclude from this exercise that the Bolts are not as good as the Filters or Drums, but it does show that unless you can increase the sales volume of the Bolts without simultaneously increasing stock, then you should probably push the sales of the Filters and Drums, in that order. 5 -Page 5

9 2: Customer Profitability Analysis - Exercise AVE. VALUE / SALE ( ) AVE. GP / SALE ( ) CUSTOMER GROUP UK N. Ireland Republic TOTAL ANNUAL SALES ( ) AVE. DEBTORS ( ) 5,000k 4,000k 6,000k 15,000k 1,200k 1,600k 1,700k 4,500k 6 Typical conclusion: The Republic is the best as it has the highest annual revenue Question: is that conclusion always the correct one given the number of invoices issued in the Republic is 2500 and a gross profit of 45% is earned for this segment? -Page 6

10 For the Republic (only) 1. Calculate the the average value per invoice 2. Calculate in the gross profit per invoice 3. Calculate the Debtors Turn 4. How many days in a year 5. Multiply the total days in a year by the Debtors Turn 6. Calculate the Gross Profit 7. Divide the Gross Profit by the Debtors Days -Page 7

11 Analyzing The Numbers CUSTOMER GROUPS Formula UK N. Ireland Republic Total Sales % of total a 5,000k 33% 4,000k 27% 6,000k 40% 15,000k 100% GM% b 53% 70% 45% 56% Gross Profit (GP) c = a x b 2,650k 2,800k 2,700k 8,150k % of total 32% 35% 33% 100% #. of invoices d 1,500 2,500 2,500 6,500 Average value / invoice e = a / d GM per invoice f = c / d Average amount g 1,200k 1,600k 1,700k 4,500k outstanding % of total 27% 35% 38% 100% Debtor turnover (days) h = (gx365) /a ROI i = c / g Page 8

12 Interpreting The Numbers 9 The Republic contributes the highest amount of sales revenue, yet returns the lowest gross margin of the three customers AND has the lowest return on investment. That could potentially mean that if you were able to free up some of the time and resources taken in servicing the Republic and allocate that to the UK or Northern Ireland, your bottom line could be increased. Again, this analysis will not provide you with a complete answer; it is intended to be a diagnostic tool to get you thinking. Without the analysis, however, nothing changes and potential opportunities are lost. -Page 9

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14 Return on Equity % Profitability 31/10/ /10/ /10/ % -8.70% 12.59% Inventory Turnover (Days) Solvency 31/10/ /10/ /10/ Receivables Turnover (Days) 31/10/ /10/ /10/ Payables Turnover (Days) 31/10/ /10/ /10/ Revenue per Team Wages Productivity 31/10/ /10/ /10/ Revenue per Employee 31/10/ /10/ /10/ Break-even Revenue Leverage 31/10/ /10/ /10/ ,867 13,553 12,258

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16 Period : Nov to Oct JFK Suppliers Limited Monthly Cashflow Projections Nov. Dec. Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Total CASH IN Opening Debtors , , ,656 Receipts from Sales ,160 1,183 1,239 1,194 1,263 1,252 1,165 1,202 11,963 TOTAL IN ,025 1,140 2,769 1,329 1,239 1,194 1,263 1,252 1,165 1,202 15,619 CASH OUT Opening Creditors Purchases ,769 Vat Installments Discounting Advance Out 1,911 1,911 Wages & Salaries ,300 Directors Renumerat Pension Costs Staff Training Rent Rates Insurance Light & Heat Cleaning Repairs & Maintenanc Security Print, Post, Station Advertising Telephone Computer Motor Expenses Consumables Travel & Entertain Legal & Prof Accountancy Donations Subscriptions TOTAL OUT 2, , ,019 Surplus/Deficit (2,232) 329 1, , ,600 Opening Bank Bal. (294) (2,526) (2,214) (1,134) (753) 1,457 2,250 2,876 2,968 3,537 4,177 4,581 (294) Interest (17) (27) (44) CLOSING BANK BAL. (2,526) (2,214) (1,134) (753) 1,457 2,250 2,876 2,968 3,537 4,177 4,581 5,262 5,262