Question

What is meant by absolute profitability? What is meant by relative profitability?

Answer 1

When there is a constraint force of tradeoff between two or more product or customers , a decision has to be taken regarding dropping of a product,customer.The overall impact of this decision on the organizations profitability is called Absolute Profitability.Absolute profitability can also be measured by taking the difference between incremental revenues and incremental cost of certain products or customers.

Relative profitability is related with ranking of customers or products to identify where should the importance be given when the environment or the resources are scarce.For ranking purpose Profitability Index are widely used.The formula for profitability index is net present value/ initial investment.