Gross Profit Price, Volume and Mix Analysis (Profit Bridge)
If you’ve ever been a financial analyst looking for an explanation to senior management as to why the gross margin varied from budget or prior year, you know it sometimes is not easy to explain. Without the right tools the process can seem endless. This is where a good report of Price, Volume, Mix for Gross Profit in SAP Business One can come in very handy.
Let’s say you have the following numbers from our financial statement:
The CFO is asking how Sales went up by nearly 10%, SG&A remains constant, and our profit drop so much. You begin to peruse the Cost of Goods Sales accounts and are soon overwhelmed.
Previously, we showed you the Price, Volume, Mix (PVM) report for revenue. This report explains variances in revenue from budget or prior year. However, if you need to explain why your gross profit differed from budget or prior year, you need a similar report but for gross profit. The PVM for Revenue will only go so far. Take a look at the typical output from our PVM for Profit report.
The analyst is now armed with information. While the company’s higher priced products, A and B actually sold at a higher price than the year before, Product C, which is a lower margin product sold at an average lower price. This resulted in a hit to the profit margin of $45,000 dollars. Due to the lower price of Product C, more customers bought more of C, compared to A and B, than last year. The total units for the company went up, causing a positive Volume Effect. However, the mix of product sales shifted more heavily to Product C which is the lower margin product, resulting in a significant negative Mix effect.
If you would like to find out more ways to evaluate your profitability, check out our site at www.audaz.com. You can view the PVM for Profit in SAP Business One report here.
To understand how the PVM works, see our Blog Post or our explanatory video on PVM for Revenue.