Direct product profitability

Product profitability is intended to determine exactly how profitable an individual product is in retail or in the consumer goods industry. There have been first approaches to a calculation since the 1960s.

Calculation of product profitability

In order to calculate the product profitability, the direct product costs at the wholesale or retail level are deducted from the gross profit and the result is related to an individual sales unit.

However, this calculation is not entirely free of conflict. This has been discussed in the German consumer goods industry and also in retail since 1985. Traders criticize parameters that are not taken into account in this calculation method. This includes decisions about distribution logistics and turnover as well as the trade margin.

These two parameters are considered to be the dominant decision parameters for accurately calculating product profitability.
The US Food Marketing Institute is a pioneer in the field of the new calculation. In 1985 an attempt was made to create a model that would satisfy all users in the USA.

Criticism and problems

When calculating product profitability, the following problems arise:

  • the profitability is a quotient of the profit for the period and the capital used and can therefore only be calculated precisely afterwards
  • it is not possible in practice to divide all the costs incurred to a single item
  • even approximate values are not justifiable from a business point of view
  • no temporal cost allocation to individual articles possible

Conclusion: Trotz neuer Berechnungskonzepte ist es auch aktuell in den meisten Fällen immer noch nicht möglich, fixe und variable costs produktabhängig genau zu berechnen.

Summary

  • direct product profitability is supposed to show how profitable an individual product is
  • The calculation method used is criticized because important parameters are not taken into account
  • The US Food Marketing Institute is developing a new calculation model
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