Question

briefly identify the determinants of profit and loss. Explain how two companies in the same industry might have radically different profit earnings during the same accounting period. What would you consider to be the important impact of the variables on competitive strategy?

I need a long answer around 1800 words

Answer 1

The major determinants of Profit and Loss are as follows:

·         Sales Price and Sales volume

·         Variable Expenses

·         Fixed Expense

·         Finance Cost

·         Non-Cash Expenditure

·         Salary & wages

Two companies of the same industry can have radically different profit earnings during same accounting period, and this can be due to any of the below mentioned reasons:

1) One company could have sold goods with low profit margin in comparison to other company leading to same sales figure but different profits. E.g. Company A sells 100 items at Rs. 10. Thus sales amount to Rs. 1000. Purchase price per unit is Rs. 5. Thus Company A earns a profit of Rs. 500 {i.e. 100*(10-5)}. Whereas company B sells 50 items at Rs. 20. Thus sales amount to Rs. 1000. Keeping the purchase price constant at Rs. 5 per unit. The profit reported by company B comes to Rs. 750 {i.e. 50*(20-5)}.

2) One company could have advantage of competitive purchase price in comparison to other company. This could be due to good bargaining power or due to good business relations.

3) One company could have borrowed money from bank at lower rate of interest than other company leading to less finance cost (interest expenses) during the year resulting in difference in profit margin.

4) One company could have aggressive sales strategy than the other leading to higher expenses resulting in different profit margin.

Few important competitive strategy variables are as follows:

1) Quality: Customers nowadays prefer quality products. Keeping an eye on innovation and quality will also lead to retention of existing customers.

2) Marketing/Advertisement: Advertising a product helps to gain the attention of a larger customer base. Thus, advertising in new publications or advertising more frequently helps to strengthen the customer base.

3) Location: This will help in easy availability of Raw Materials and Labour, lesser transportation cost, scope for expansion, accessibility to markets, etc.

4) Employee Training and Development: This is an important variable which many companies miss. Training of employees on a regular basis keeps them involved in the business and helps them enhance their skill and knowledge which in turn helps them to deliver better service.

5) SWOT Analysis: One should always carry out a SWOT (Strength, Weaknesses, Opportunities and Threats) analysis to improve the business market share.