An examination of the use of profitability analysis in manufacturing industry

Abstract

Although profitability analysis has been identified as a useful technique, it is an under-researched area. This paper extends the limited research into profitability analysis by using research interviews to examine the circumstances when profitability analysis is or is not prepared, why various types of profitability analysis are prepared and the how it is used in decision making. Some notable results indicate that operating units prepare profitability analysis when there is an interest in preparing it and the resources exist to prepare it. Operating units prepare both product profitability analysis (PPA) and customer profitability analysis (CPA) to assist with increasing profits through managing low profit or loss making customers. The aim is to identify those products that contribute to the low profit or loss of a customer. In those operating units preparing only PPA, its function is to identify low profit or unprofitable products. This information is used to assist in determining what action should be take to increase the profits of those products. In contrast, customer focused operating units produce only CPA.