Product profitability: Causes and effects

Matti Sievänen*, Petri Suomala, Jari Paranko

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

8 Citations (Scopus)

Abstract

The aim of this study was to determine the extent and the reasons for variation in the profitability of a product. The underlying hypothesis was that all products are not profitable. Furthermore, it was assumed that activity-based costing (ABC) would indicate greater differences in the profitability of products than the previously used marginal costing system. The case study was conducted in a company in the metal industry that manufactures and assembles industrial goods. First, the activity chains were modeled and the activity-based costs were calculated. Second, the activity-based cost of the final products was compared with the selling prices to determine the profitability. The results show that the profitability varies significantly. The most profitable 20% of the products generate more than 150% of the profits and 50% of the net sales. Finally, the study identifies the characteristics of the most profitable products and discusses the reasons for the profitability.

Original languageEnglish
Pages (from-to)393-401
Number of pages9
JournalIndustrial Marketing Management
Volume33
Issue number5
DOIs
Publication statusPublished - 1 Jul 2004
MoE publication typeA1 Journal article-refereed

Keywords

  • Activity-based costing
  • Cost management
  • Product profitability

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