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R.V.A. & P.V.A.Revenue & Profit Variance Analysis

Profit Increase

Profit Variance Analysis

Base Profit

New Profit

The objective of a PVA is to explain – either retrospectively

or prospectively – the sources (causes) of change in

profitability between periods.

Based on an understanding of these profit drivers, strategies

and tactics can be modified for higher profitability.

?

?

?

?

?

?

How much did profit increase (or decrease) because:

• The “real” market (in units) grew or shrunk

• Production factors cost more or less (cost inflation) or

productivity (amount of inputs required to produce a

unit of output) increased or decreased

• The company gained or lost market share (in units)

• The company raised or lowered prices

• Other factors effected profitability (e.g. a shift in “mix”

from higher to less profitable products)

PVA: Profit Variance Analysis


• Determine the total period-to-period

change to be reconciled

• Change one factor at a time, in this order:

(1) External factors before internal factors

(2) „Real‟ factors before „nominal‟ factors

“Real” = in units or net of inflation

“Nominal” = current dollars, inflated

WARNINGThis material is intended strictly for current MSB students in MARK 557

(Price, Value & Profitability)

Any “pass along” of the material or its access information -- in any form – verbal, printed or simply viewed -- now or ever -- to anyone not currently enrolled in MARK 557 -- is a breach of academic integrity policies and is subject to disciplinary action.

Profit Increase

Profit Variance Analysis

Base Profit

New Profit

The objective of a PVA is to explain – either retrospectively

or prospectively – the sources (causes) of change in

profitability between periods.

Based on an understanding of these profit drivers, strategies

and tactics can be modified for higher profitability.

?

?

?

?

?

?

How much did profit increase (or decrease) because:

• The “real” market (in units) grew or shrunk

• Production factors cost more or less (cost inflation) or

productivity (amount of inputs required to produce a

unit of output) increased or decreased

• The company gained or lost market share (in units)

• The company raised or lowered prices

• Other factors effected profitability (e.g. a shift in “mix”

from higher to less profitable products)


Price

Market

Share

Profit IncreaseBase Profit

New Profit

Mix


Cost

Assumptions

Base Case (e.g. this year)

• Market estimate: 100,000 units

• Sold 10,000 units at $10 each

(Market share = 10 %)

• Variable costs = $10.00

• Fixed costs = $19.000

Projection(e.g. this year)

• Market grew to 130,000 units

• Sold 14,000 units at $10.50 each

(Market share = 10.8 %)



Example

Process

Assumptions

Base Case (e.g. this year)






Projection(e.g. this year)






2.

Reconcile

1. Construct P&L

Start with RVA Revenue Variance Analysis

To do a PVA :

PVA RVA

Reconcile revenue not profit

Same factors except cost

RVA: Revenue Variance Analysis

Price

Market

Share

Revenue IncreaseBase Revenue

New Revenue

Mix

RVA: Revenue Variance Analysis

RVA Example

Assumptions

In the base year (e.g. last year):




In the projection year (e.g. this year):




Starting Point

Assumptions

Calculate period-to-period factor changes(may be useful in subsequent analytical steps)

• Calculate the revenue in each period



Assumptions



• Change one factor at a time, in this order:

(1) External factors before internal factors

(2) „Real‟ factors before „nominal‟ factors

“Real” = in units or net of inflation

“Nominal” = current dollars, inflated

Assumptions

More specifically …

$100,000

$147,000

$47,000

1. Calculate the base case revenue

Assumptions

$100,000

$47,000

$147,000

1. Calculate the base case revenue.

2. Recalculate revenue using the

projected market size.

The difference is the portion of the

revenue change attributable to

market growth.

Assumptions

$30,000

$100,000

$47,000

$147,000





projected market share (applied

to the projected market).



market share gain (loss).

Assumptions

$30,000

$10,000

$100,000

$47,000

$147,000





projected market share.


projected price.



price.

Assumptions

Price

Market

Share


New Revenue

Mix

RVA –Revenue Variance Analysis

What‟s left unexplained …

$100,000

$30,000

$10,000

$7,000

$0

$147,000

$47,000





projected market share.


projected price.

Note that market, share and price explain the entire revenue

change ($47,000) … there is no mix impact in this example.

Price

Market

Share


New RevenueNew Revenue

Mix

RVA RVA ––Revenue Variance AnalysisRevenue Variance Analysis

Assess the implications re:Strategy? Tactics? Execution?

From RVA to PVA …

RVA PVA

Reconcile profit not revenue

Add cost factors to analysis

From RVA to PVA …

Price

Market

Share

Profit IncreaseBase Profit

New Profit

Mix


Cost

Sequence in

the analysis

• Fixed (overhead, programs)

• Variable (labor, material, etc.)

• Inflation (price of factor inputs)

• Productivity (more output, less input)

Cost factors to consider

PVA Example

Assumptions

• Same assumptions as in the RVA example, plus …

• Variable costs increase from $10.00 per unit to $10.50

• Fixed costs decrease from $20,000 per year to $19,000

Assumptions

Assumptions

Apply the same analytical logic

as in the RVA example, except:

Insert steps (between market

and share) to determine the

impact of variable and fixed costs.

Note: cost impact can be further

broken down into inflation,

productivity, etc.

R.V.A. & P.V.A. - McDonough School of Businessfaculty.msb.edu/homak/homahelpsite/webhelp/Content/PVA...

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