R.V.A. & P.V.A.
Revenue & Profit Variance Analysis
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Do not copy, post, or pass along in any form.
Profit Variance Analysis
Base Profit
Profit Increase
?
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.
?
?
?
?
New Profit
PVA: Profit Variance Analysis
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
PVA: Profit Variance Analysis
R.V.A. & P.V.A.
Revenue & Profit Variance Analysis
Proprietary Material
Do not copy, post, or pass along in any form.
WARNING
This material is intended strictly for
current MSB students in MARK 557
(Price, Value & Profitability)
Any “pass along” of the material or its access
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Profit Variance Analysis
Base Profit
Profit Increase
?
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.
?
?
?
?
New Profit
PVA: Profit Variance Analysis
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
Base Profit
Profit Increase
Market
Cost
Share
Price
Mix
New Profit
Assumptions
Example
Base Case
Projection
(e.g. this year)
(e.g. this year)
• Market estimate: 100,000 units
• Market grew to 130,000 units
• Sold 10,000 units at $10 each
(Market share = 10 %)
• Sold 14,000 units at $10.50 each
(Market share = 10.8 %)
• Variable costs = $10.00
• Variable costs = $10.50
• Fixed costs = $19.000
• Fixed costs = $18.000
Process
Assumptions
Base Case
Projection
(e.g. this year)
(e.g. this year)
• Market estimate: 100,000 units
• Market grew to 130,000 units
• Sold 10,000 units at $10 each
(Market share = 10 %)
• Sold 14,000 units at $10.50 each
(Market share = 10.8 %)
• Variable costs = $10.00
• Variable costs = $10.50
• Fixed costs = $19.000
• Fixed costs = $18.000
1. Construct P&L
2.
Reconcile
To do a PVA :
Start with RVA
Revenue Variance Analysis
RVA: Revenue Variance Analysis
Reconcile revenue not profit
PVA
RVA
Same factors except cost
RVA: Revenue Variance Analysis
Base Revenue
Revenue Increase
Market
Share
Price
Mix
New Revenue
RVA Example
Assumptions
Starting Point
In the base year (e.g. last year):
• Market estimate: 100,000 units
• Sold 10,000 units at $10 each
(Market share = 10 %)
In the projection year (e.g. this year):
• Market grew to 130,000 units
• Sold 14,000 units at $10.50 each
(Market share = 10.8 %)
Assumptions
Calculate period-to-period factor changes
(may be useful in subsequent analytical steps)
Assumptions
• Calculate the revenue in each period
• Determine the total period-to-period
change to be reconciled
Assumptions
• 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
More specifically …
$100,000
Assumptions
$47,000
$147,000
1. Calculate the base case revenue
$100,000
Assumptions
$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.
$100,000
Assumptions
$30,000
$47,000
$147,000
1. Calculate the base case revenue.
2. Recalculate revenue using the
projected market size.
3. Recalculate revenue using the
projected market share (applied
to the projected market).
The difference is the portion of the
revenue change attributable to
market share gain (loss).
$100,000
Assumptions
$30,000
$47,000
$10,000
$147,000
1. Calculate the base case revenue.
2. Recalculate revenue using the
projected market size.
3. Recalculate revenue using the
projected market share.
4. Recalculate revenue using the
projected price.
The difference is the portion of the
revenue change attributable to
price.
RVA –Revenue Variance Analysis
Base Revenue
Revenue Increase
Market
Share
Price
What‟s left unexplained …
New Revenue
Mix
$100,000
$30,000
$47,000
$10,000
$7,000
$0
$147,000
1. Calculate the base case revenue.
2. Recalculate revenue using the
projected market size.
3. Recalculate revenue using the
projected market share.
4. Recalculate revenue using the
projected price.
Note that market, share and price explain the entire revenue
change ($47,000) … there is no mix impact in this example.
RVA –Revenue Variance Analysis
Revenue Increase
Base Revenue
Market
Share
Price
Mix
New Revenue
Assess the implications re:
Strategy? Tactics? Execution?
From RVA to PVA …
From RVA to PVA …
Reconcile profit not revenue
RVA
PVA
Add cost factors to analysis
PVA: Profit Variance Analysis
Base Profit
Profit Increase
Market
Cost
Share
Price
Mix
New Profit
Sequence in
the analysis
Cost factors to consider
• Fixed (overhead, programs)
• Variable (labor, material, etc.)
• Inflation (price of factor inputs)
• Productivity (more output, less input)
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.
Revenue & Profit Variance Analysis
Proprietary Material
Do not copy, post, or pass along in any form.