3 Important Profitability Analysis Approaches – Turnaround Quick Hit
Four Walls Analysis: A four wall analysis shows revenue with fixed and variable costs for specific locations. The analysis will clearly show what contributes or detracts from store profitability. It is best to do it initially without the allocation of corporate overhead, and then again with corporate overhead allocation applied.
Breakeven Analysis: A breakeven analysis is a financial calculation that determines the point at which a business will begin to turn a profit. It involves identifying the fixed costs of the business and the variable costs associated with producing and selling each product or service. By determining the number of units that need to be sold to cover the fixed costs, a business can determine the minimum level of sales required to reach profitability. By determining the breakeven point, a business can assess the minimum level of sales required to reach profitability, and make decisions on pricing, production, and other factors that can affect the level of sales and costs.
The calculation for breakeven analysis is as follows:
Breakeven Point = Fixed Costs / (Selling Price per Unit - Variable Costs per Unit)
Where:
Fixed costs are the costs that do not change regardless of the level of production or sales, such as rent, insurance, and salaries.
Selling price per unit is the price at which the product or service is sold.
Variable costs per unit are the costs that vary with the level of production or sales, such as materials, labor, and shipping.
Contribution Analysis: Contribution analysis is a method for determining the amount of revenue and profit contributed by each product, service, or division within a business. The analysis helps to determine which products, services, or divisions are most profitable and which ones may be costing the business money. Contribution analysis helps a business to make informed decisions about pricing, production, and product or service offerings. By focusing on the most profitable products or services, a business can increase its overall profitability and make the best use of its resources.
The calculation for contribution analysis is as follows:
Contribution Margin = Selling Price per Unit - Variable Costs per Unit
Where:
Selling price per unit is the price at which the product or service is sold.
Variable costs per unit are the costs that vary with the level of production or sales, such as materials, labor, and shipping.
The contribution margin represents the amount of revenue that is available to cover the fixed costs and generate profit for each unit sold. By calculating the contribution margin for each product, service, or division, a business can determine which ones are most profitable and which ones may be costing the business money.