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28 FEDA News & Views D istribution managers have long been enamored with the idea of gener- ating incremental sales volume. Theoretically, incremental volume repre- sents additional sales that can be gener- ated without any increase in expenses. In distribution vernacular, "it all goes to the bottom line." The problem with the incre- mental volume concept is that there are both good and bad ways of generating it. In the overwhelming majority of cases, the costs associated with servicing the sale tend to be underestimated. Further, the idea of a "cost-free" sale too often leads to serious margin erosions. The combina- tion of higher-than-planned expenses and a low gross margin is almost always disastrous. This report examines how the con- cept of incremental volume can be employed successfully in distribution organizations. It does so by examining two specifi c issues: the fi nancial impact of incremental volume (a review of the impact that efforts to generate incremental volume can have on dis- tribution fi rms under alternative cost and margin scenarios); and controlling incremental sales (a discussion of the various ways that fi rms can ensure that incremental sales volume actually pro- duces incremental profi ts). The Financial Impact of Incremental Volume Exhibit 1 looks at the economic impact of incremental volume under present conditions and three different scenarios. As reported in the PROFIT Report, the fi rst column presents the fi nancial posi- Exhibit 1 The Impact of Incremental Volume Under Diff erent Assumptions For a Typical FEDA Member 10% Increase in Sales Volume Current Theoretical Best Case Sad Reality Income Statement Results Scenario Scenario Scenario Net Sales $17,500,000 19,250,000 19,250,000 19,180,000 Cost of Goods Sold 13,562,500 14,918,750 14,918,750 14,918,750 Gross Margin 3,937,500 4,331,250 4,331,250 4,261,250 Expenses Payroll and Fringe Benefi ts 2,625,000 2,625,000 2,887,500 2,887,500 All Other Expenses 962,500 962,500 1,039,500 1,039,500 Total Expenses 3,587,500 3,587,500 3,927,000 3,927,000 Profi t Before Taxes $350,000 $743,750 $404,250 $334,250 Net Sales 100.0 100.0 100.0 100.0 Cost of Goods Sold 77.5 77.5 77.5 77.5 Gross Margin 22.5 22.5 22.5 22.5 Expenses Payroll and Fringe Benefi ts 15.0 13.6 15.0 15.0 All Other Expenses 5.5 5.0 5.4 5.4 Total Expenses 20.5 18.6 20.4 20.4 Profi t Before Taxes 2.0 3.9 2.1 1.7 continued on page 30 Making Incremental Volume Profi table Volume By Dr. Albert D. Bates Director of Research, Profi t Planning Group Money Matters