science

Profitability analysis

Profitability analysis is a science topic covered in the lgStudy science library. This page brings together a partial reference excerpt, illustrations, worked examples, real-world applications and a short study plan, so you can understand Profitability analysis rather than just read about it. In short: In cost accounting, profitability analysis is an analysis of the profitability of an organisation's output. Output of an organisation can be grouped into products, customers, locations, channels and/or transactions.

Key takeaways

Profitability analysis belongs to science; place it in that map before memorising details.
Learn the definition first, then one example that makes the definition concrete.
Connect Profitability analysis to a quantity you can measure, compute or draw — that is where exam questions come from.
Reproduce the core statement of Profitability analysis from memory before moving on to harder problems.

Reference excerpt

In cost accounting, profitability analysis is an analysis of the profitability of an organisation's output. Output of an organisation can be grouped into products, customers, locations, channels and/or transactions.

Description In order to perform a profitability analysis, all costs of an organisation have to be allocated to output units by using intermediate allocation steps and drivers. This process is called costing. When the costs have been allocated, they can be deducted from the revenues per output unit. The remainder shows the unit margin of a product, client, location, channel or transaction. After calculating the profit per unit, managers or decision makers can use the outcome to substantiate management decisions. Managers can decide to stop selling loss making products, to reduce costs for loss making customers or to increase sales in profitable locations.

Pareto analysis In profitability analysis it is possible to perform a Pareto analysis by ranking output units from most profitable to least profitable. By doing so it is possible to create a so-called 'Whale Curve', graphically showing the potential margin of an organisation.

References

Illustrations

Worked examples

Example 1 — a first encounter with Profitability analysis

Start with the simplest possible case. Write down what Profitability analysis claims or describes in one sentence, then invent the smallest concrete situation in which that sentence is true. In science, the smallest case is usually a single object, a single equation or a single measurement. Check that every symbol or term in your sentence has a meaning in that case.

Example 2 — changing one variable

Take the situation from Example 1 and change exactly one quantity: double it, halve it, or set it to zero. Predict what should happen to Profitability analysis before you calculate. Comparing your prediction with the result is the fastest way to find out whether you understand the idea or only the words.

Example 3 — an exam-style question

Typical questions about Profitability analysis ask you to (a) state it precisely, (b) apply it to given data, and (c) explain a limitation. Practise writing all three answers in under five minutes; the third part is what separates a full-mark answer from an average one.

Applications of Profitability analysis

In research: Profitability analysis appears in science research whenever the underlying quantities have to be modelled precisely. Papers usually cite it as a starting assumption and then explore where it breaks down.
In technology and industry: Engineering practice reuses Profitability analysis in design rules, simulations and safety margins. Knowing the idea lets you read a specification sheet and understand why the numbers look the way they do.
In the classroom: Profitability analysis is common in secondary-school and first-year university syllabi. It links to neighbouring topics Costs, Finance stubs, Management accounting, so understanding it makes those chapters shorter.
In everyday life: Look for Profitability analysis outside the textbook — in sport, cooking, traffic, electronics or the sky above you. An example you found yourself is remembered far longer than one you were given.

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How to study Profitability analysis in 20 minutes

Read the reference excerpt below once, without taking notes.
Close the page and write down what Profitability analysis means in your own words.
Compare your version with the excerpt and mark what you missed.
Work through the three examples above with pen and paper.
Explain Profitability analysis out loud to somebody else — or to Teacher Smith in the lgStudy chat.

Frequently asked questions

What is Profitability analysis in simple terms?

Why does Profitability analysis matter?

Because it connects several science ideas at once: it gives you a definition you can apply, a quantity you can calculate, and a way to check whether a result is plausible.

How should I study Profitability analysis?

Read the excerpt, restate it from memory, then work through the examples and applications listed on this page. The five-step study plan above takes about twenty minutes.

What does this page cover?

It gives you a compact reference excerpt plus original lgStudy explanations, examples, applications and study material on Profitability analysis.