Profitability profitability is measured by the profit

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Profitability Profitability is measured by the profit margin (Net income/Sales). Analysis of profitability typically examines per- formance over time relative to benchmarks (such as competitors' or industry performance), which highlights trends and abnormalities. When abnormal performance is discovered, managers either correct suboptimal performance or protect superior performance. There are two general areas of profitability analysis: gross profit margin analysis and expense management. Gross Profit Margin The gross profit margin (Gross profit/Sales) is crucial. It measures the gross profit (sales less cost of goods sold) for each sales dollar. Gross profit margin is affected by both the selling prices of products and their
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Module 3 I Profitability Analysis and Interpretation 3-28 - ruring cost. When markets are more competitive (or when products lose their competitive advantage), a com- _ must reduce product prices to maintain market share and any increases in manufacturing costs cannot be directly on to customers; suggesting managers mustfocus on reducing costs.This might result in outsourcing of activities er labor costs and/or finding lower-cost raw materials. Such measures can yield a loss of product quality if not properly, which could further deteriorate the product's market position. Another strategy is to reduce product not valued by the market. Focus groups of consumers can often identify these non-value-added product features can be eliminated to save costs without affecting the product's value to consumers. se Management Managers can focus on reducing manufacturing and/or administrative (overhead) expenses e profitability. Manufacturing overhead refers to all production expenses other than manufacturing labor and :=e:ials. These expenses include utilities, depreciation, and administrative costs related to manufacturing the product. istrative overhead refers to all expenses not in cost of goods sold such as administrative salaries and benefits, eting, legal, accounting, research and development. These overhead costs must be managed carefully as they can nt investments. Reductions in spending on advertising and research yield short-run, positive impacts on profit- __but can yield long-run deterioration in the company's market position. Likewise, requiring employees to work and longer can delay increases in wage-related costs, but the likely decline in employee morale can create long- gative consequences. ductivity tivity in the DuPont model refers to the volume of dollar sales resulting from each dollar invested in assets. a decline in productivity is observed, managers have two avenues of attack: In rease sales volume from the existing asset base, and/or Decrease the investment in assets without reducing sales volume. first approach focuses on capacity utilization. Increasing throughput lowers per unit manufacturing costs as osts are spread over a larger sales base. The second approach focuses on elimination of excess assets. That ction increases cash and also reduces carrying costs associated with the eliminated assets.
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