Part 2 book “The essentials of finance and accounting for nonfinancial managers” has contents: Analysis of business profitability, return on investment, financing the business, business planning and the budget, final thoughts. | PART 3 Decision Making for Improved Profitability CHAPTER NINE Analysis of Business Profitability The discussion in this chapter will focus on the factors that determine the profitability of individual products and help us to improve the decisions that we make concerning these products. We will measure and evaluate the factors that determine the profitability of a product, including: Product price Unit volume sold Costs, both fixed and variable Profitability The financial tool used to achieve these goals is called breakeven analysis. We begin our discussion by looking at the operating budget for Raritan Manufacturing Company, which is presented in Exhibit 9-1. Raritan has established revenue, spending, and profit targets. Exhibit 9-1. Raritan Manufacturing Company Annual Budget Note that the costs are divided into major categories and also separated into their fixed and variable components. Identifying which costs are fixed and which are variable is very valuable for effective decision making. To keep things simple, we will assume that Raritan Manufacturing Company is a one-product business. All of the basic principles of this analysis are equally valid for a multiproduct business. Most of these principles are also applicable to a service business; some of the terminology and processes differ, but conceptually the analyses are the same. The analysis that a manufacturing company develops is called a standard cost system. This is an accounting-oriented mechanism that attempts to identify how much the company will spend during the budget year under different volume assumptions. In the financial services industries, this process is called a functional cost analysis. After the business has been analyzed using the concepts of breakeven analysis, the actual performance is evaluated as it takes place. This is often called variance analysis. Variance analysis provides management with the ability to evaluate actual
