Impact of Changes in Price and
Sales Volume on Change in
Revenue
Classic Variance Analysis
New Impact Analysis
Methods of Evaluating
Performance Changes
• Analysis of Sales Variance (pg.52)
Differences must be explained
• Revenue in period a = Pa x Qa
•
Or Revenue in period a = Price period a (Quantity period a)
• Revenue in period b = Pb x Qb
•
Or Revenue in period a = Price period a (Quantity period a)
• Revenue in a - Revenue in b = Revenue Change
aka Variance in Revenue
• Is the difference due to changes in Price
or Quantity or both?
1
Differences must be explained
• Revenue in period a = Pa x Qa
•
Or Revenue in period a = Price period a (Quantity period a)
• Revenue in period b = Pb x Qb
•
Or Revenue in period a = Price period a (Quantity period a)
• Revenue in a - Revenue in b = Revenue Change
aka Variance in Revenue
• Is the difference due to changes in Price
or Quantity or both?
Revenue Variance Has Two Parts
• Revenue Variance =
Price Variance + Volume Variance
• Price Variance =
(Price in a -Price in b)(Qty sold in a)
• Quantity or Volume Variance =
(Price in b)(Qty in a - Qty in b)
Quantity
Revenue = Price x Quantity
Qa
Ra
Pa
Price
2
Quantity
Lower price gives lower
revenue
Rb
Ra
Qa
Pb
Pa
Impact on
Revenue Change
due to
Price Change
Price
Quantity
Larger Sales Volume gives
Larger Revenue
Qb
Impact due to
Price Change
Rb
Ra
Qa
Pb
Pa
Price
Quantity
Impact on
Revenue Change
due to
Quantity Change
Qb
Impact due to
Price Change
Rb
Ra
Qa
Pb
Pa
Price
3
Quantity
Qb
Rb
Quantity
Impact
Ra
Qa
Price
Impact
Pb
Price
Pa
Variance Analysis:
Traditionally used in
Budgeted versus Actual Result
Example
• Last period Sales Revenue was $10,000 but
current Revenue was $8,800.
• What amount of Revenue Change is
explained by Variance in the Volume Sold?
• What amount of Revenue Change is
explained by Variance in the Price per unit?
4
Last period
Current
period
Change
Revenue
$10,000
$8,800
$1,200
Quantity
Sold
units
Price per
Unit
5,000
4,000
-1,000
$2.00
$2.20
+$0.20
Last period
Current
period
Change
Revenue
$10,000
$8,800
-$1,200
Quantity
Sold
units
Price per
Unit
5,000
4,000
-1,000
Impact in
$?
$2.00
$2.20
+$0.20
Impact in
$?
Last period
Current
period
Change
Revenue
$10,000
$8,800
$1,200
Quantity
Sold
units
Price per
Unit
5,000
4,000
$2.00
$2.20
1,000
Loss of
$2,000
$0.20
Gain of
$800
5
Price-Volume Variance
Target
Actual
Variance
Quantity
Price
Revenue
5000
$2.00
$10,000
4000
$2.20
$8,800
–1000
$0.20
–$1,200
Impact of ∆P
$0.20 x
4000
Impact of ∆Q
$2.00 x
–1000
$800 due
to price
change
–$2000
due to
volume
change
Revenue Deviation
Has Two Parts
• Change in Revenue =
$8,800 –$10,000 = –$1,200 unfavorable
• Price Variance =
($2.00 - 2.20)(4000) = $800 favorable
• Quantity or Volume Variance =
($2.00)(4000 - 5000) = –$2000 unfavorable
• Accountant’s Variance Analysis allows
marketing managers to consider the
efficiency and effectiveness of the business
in reaching its goals compared to its plan
and budgets.
6
A More General Calculation
• Ra – Rb = Pm (Qa – Qb) + Qm (Pa –Pb) + r
– where
• Ra – Rb = difference in revenue
• Pm (Qa – Qb) = impact on revenue due to deviation from
planned quantity
• Qm (Pa –Pb) = impact on revenue due to deviation from
planned price
• r = residual impact not explained by individual deviations
in price and quantity
– Subscripts a = actual, b = planned, m = minimum of planned or actual
A More General Calculation
•
Ra – R b = Pm (Q a – Q b) + Qm (P a –Pb) + Accountants
r
–
•
•
•
•
call it
Quantity Variance
where
Ra – R b = difference in revenue
Pm (Q a – Q b) = impact on revenue due to deviation from planned
quantity
Qm (P a –P b) = impact on revenue due to deviation from planned price
r = residual impact not explained by individual deviations in price and
quantity
–
Subscripts a = actual, b = planned, m = minimum of planned or actual
Accountants call it
Price Variance
Quantity
Qa
Qb
Quantity
Ra
Quantity
Impact
Qb
Rb
Qa
Price
Impact
Pa
Pb
Residual
Ra
Price
Price
Impact
Pa
Quantity
Pb Price
Quantity
Qa
Qb
Rb
Quantity
Impact
Ra
Quantity
Impact
Residual
Rb
Price
Impact
Pb
Qb
Qa
Pa
Price
Quantity
Impact
Rb
Price
Impact
Pb
Ra
Pa
Price
7
• Calculating the Impact of Changes in Price
and Changes in Quantity on Changes in
Sales Revenue from period to period is an
Important Analysis
– Closely Related to Price Sensitivity (Elasticity)
Any Questions?
8