Page 7 - CIMA MCS Workbook February 2019 - Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

TASK 3 – PROFITABILITY AND BREAK‐EVEN ANALYSIS

To: Senior financial manager
From: Financial manager
Date: Today
Subject: Profitability and break‐even analysis

Customer profitability analysis

Customer profitability analysis involves analysing not just the revenues, but all costs that are
incurred due to dealing with a customer, including fixed overheads where appropriate, so that full
profitability of dealing with each customer can be analysed.

The costs would include the time of the staff dealing with the customer, along with the costs of
any materials used or laboratory work done.

The analysis would be useful where there is a disproportionate amount of cost spent in servicing a
customer when compared to the revenue earned from them.

Analyses like these could show if there are any customers who, despite bringing in good revenue,
use up so much cost that they are not very profitable to the business.

Given the nature of the customer base that Crowncare has, it may be that this type of analysis is
not very useful. While the business does get repeat business from most of its customers, the
business tends to be of a mostly standard nature, i.e. for routine check‐ups, hygiene
appointments and simple procedures such as fillings.

There may therefore be little benefit in analysing out the costs and profitability of most
customers, as they will tend be at a similar level.

Perhaps a more cost‐effective way of pinpointing inefficiency in dealing with customers would be
to get feedback from staff such as receptionists to see if they feel there are any ‘problem’
customers who they spend too much time dealing with.

Procedure profitability analysis

Procedure profitability analysis would be a similar exercise to the customer profitability analysis,
but would track costs by procedure rather than customer. It would not have to be done on an
individual procedure basis, but could be done at a practice or even company level. For instance, if
purchases of mercury amalgam related only to fillings, that would be a relatively easy cost to
charge against fillings procedures.

It may be that Crowncare’s dentists feel that they have an understanding of which procedures are
most profitable, perhaps feeling that the higher priced ones earn the most profit. But an analysis
such as this may find that the more complex procedures use up so much more dentist and nurse
time than the simpler ones, that in terms of relative profitability, the simple ones might be
bringing in a higher profit margin. For instance, a simple check‐up involves very little time and
administration work and almost no materials but brings in a fixed amount of revenue, so could
end up being the most profitable of all.

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