Session 11 - Session 11 Customer/Product Line Profitability...

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Session 11 Customer/Product Line Profitability Analysis – Another Application of Activity Based Costing
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Customer (Product Line) profitability is a function of two factors: Revenue (Price) – Costs = Profit We can go further and distinguish two types of costs that are likely to be relevant to an assessment of the profitability of a particular customer (or of a product): Product Costs Customer (Product) Specific Selling Costs To be able to assess the profitability of a customer or of a product line, we need accurate information about both the relevant product costs and the relevant selling costs attributable to that customer or product line. In prior classes we have discussed some of the issues involved in obtaining a reasonable allocation of product costs. Today we’re going to examine some issues associated with the estimation of customer-related (product line-related) selling costs.
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• Selling, General & Administrative (SG&A) costs represent costs incurred for a variety of purposes, such as selling, advertising, promotion, distribution, and allocated corporate activities. • In many cases, these costs are significant. Consider Proctor & Gamble: Year Ended 6/30/08 20.5% 17,083 Operating Profit 30.8% 25,725 51.3% 42,808 Gross Margin 48.7% 40,695 Cost of Sales 100.0% $83,503 Sales revenues % of Sales As reported ($ million) • Recall that under GAAP, SG&A costs are (non-inventoriable) period costs
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To take account of SG&A costs when pricing goods ands services, firms often simply mark-up product costs (implicitly assuming that SG&A costs
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This note was uploaded on 10/06/2010 for the course FNCE 100 taught by Professor Jaffe during the Spring '10 term at UNC Asheville.

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Session 11 - Session 11 Customer/Product Line Profitability...

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