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How to calculate your product profitabilityProduct profitability is used to let your company know how profitable a certain product is. You can figure product profitability by multiplying the unit sales volume by the profit margin of the product. The result will give you the overall profit for that product but to find its direct product profitability (how much the product makes compared to how much shelf space it uses) you need to divide the overall profit by the shelf space that it uses. For example if your profit for the product is two thousand dollars and you use one hundred centimeters of shelf space your direct product profitability is twenty dollars per centimeter. While this does not seem that hard to do product profitability can get more complicated if you sell numerous products and it can get complex because of all of the different costs that are associated with the product, etc. Because some many businesses are using product profitability to determine if they should continue using a product or to help determine what their better products are, computer software has been created to help you determine product profitability.
Need for accurate product costing: Because direct costing is becoming a thing of the past due to the increase of companies using value-added processes, which allows them to charge a product for marketing (product specific marketing), handling, inventory and support in order to gauge a product's profitability level accurately has become so complex that computer software is actually needed, you can no longer use traditional methods of standard cost accounting to determine it. What the software includes: Improvements in corporate profitability: Product profitability management also helps company's determine the entire product costs (including fixed costs) and the actual profitability of each product that they have added to their portfolio. The software also allows you to test product pricing, product mix, and service strategies for your products (different types of warranties or technical support). But best of all this software allows you to monitor and manage all of your operations and see how it affects the overall profitability, as well as having the product profitability numbers available whenever you need them. |
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