Question

Pepsi management has noticed a significant decrease in profit related to one of its product line (diet pepsi) and has tasked the managerial accountants with assisting with understanding their profits and which factors may influence their business decisions. Specifically, management wants to know how can the company increase its profit for this product by 20%.

how would i go about solving this problem?

Answer 1

For solving the above Case Study, one needs to understand the factors affecting the profits of a product.

The factors affecting the product profitability are Sale Price,Cost per product, Contribution Margin, the stage of lifecycle(introductory, growth,peak or decline) of product, the demand in the region, rise of complementary and supplementary products, competition, reputation of company, distribution system etc.

In order to increase profits, the following measures can be taken by Management to increase profits:

1. Price Discrimination

Through Price Discrimination, company can achieve super normal profits.

a. Through Price Discounting, it can increase Sales and higher sales would imply higher profits. Also the production capacity could be utilised to the maximum.

b. Through Price Rise, it can increase the Contribution Margin and thus achieving higher profits. Loyal customers would still stick to the product even after price rise.

2. Reduction in Costs

Through improving the Production System by Six sigma,TQM Techniques etc, it can bring down cost and increase efficiency. When the overall cost would fall,the per unit cost would automatically fall, thus leading to higher profits. Variable cost shall be minimized to the maximum extent to increase profits.

3. Marketing and Offers

Company can attract customers through marketing and by giving them attractive discount offers. It would rise the Sales Revenue leading to additional profit.

4. Other Methods are entry into new territory or uncovered region, value addition in product and charging extra for the same, outsourcing some activities if they lead to lower cost, discontinuing those product line which may be in loss etc.