The Tast Forward MBA in Finance

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categorie: Finante-banci

nota: 9.52

nivel: Facultate

You might be tempted to pursue the sales price reduction
plan in order to gain market share. Well, perhaps this would
be a good move in the long run, even though it would not
increase profit immediately.

The point about market share
reminds me of a line in a recent article in the Wall Street
Journal: "Stop buying market share and start boosting pr[...]
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You might be tempted to pursue the sales price reduction
plan in order to gain market share. Well, perhaps this would
be a good move in the long run, even though it would not
increase profit immediately.

The point about market share
reminds me of a line in a recent article in the Wall Street
Journal: "Stop buying market share and start boosting profits."
The sales price reduction proposal takes too big a bite out
of profit margins, even though sales prices would be reduced
only 5 percent. Even given a 25 percent sales volume spurt,
you would see a decline in contribution margin even before
taking into account any increases in fixed operating expenses.

The external income statement is useful for management
decision-making analysis, but only up to a point. It does not
provide enough information about operating expense behavior.
The internal profit report to managers adds this important
information for decision-making analysis. In management
profit reports, operating expenses are separated into variable
and fixed, and variable expenses are further separated into
those that vary with sales volume and those that vary with
sales revenue dollars.

The central importance of the proper
classification of operating expenses cannot be overstated.
This chapter walks through the analysis of a proposal to
reduce sales prices in order to stimulate a sizable increase in
sales volume.

Using information from the external income
statement, the impact of the proposal on gross margin is analyzed.
To complete the analysis, managers need the information
about operating expenses that is reported in the internal
profit report.

After analyzing the changes in variable operating
expenses, it is discovered that contribution margin (profit
before fixed operating expenses are deducted) would actually
decrease if the sales price reduction were implemented. Furthermore,
the sizable increase in sales volume raises the
possibility that fixed operating expenses might have to be
increased to accommodate such a large jump in sales volume.
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