Confusion on 3-year profit target.

Question

Hi! -- I have a clarifying question about this calculation.

So the case says the following

The goal of the client is to increase profits by 10% in three years
The client’s most recent profit was $500M

So it seems you could achieve this goal in 2 ways, depending on how you interpret it:

1. making 500M x 1.1 = 550M in year 3 alone (so 50 M extra)

2. or making 500x3x1.1 = 1650M total across the 3 years (so 150 M extra)

However, at the end of the calculation, it is assumed that the combined profit target across the 3 years is just 50 M. I am confused why this is correct, as 50 M is not a 10% increase on what you otherwise would've made across 3 years (1500 M)

Answer 1

Based on the wording, it seems accurate. In a live case, you would have needed to clarify your understanding to ensure you’re on the same page.

So the interpretation was based on the goal to increase profits *in* 3 years (for year 3) *by* 10% (assume it is relative to today). Also, for a business, the year 2 profits would be irrelevant as the goal is measured on performance of year 3, so no ramp up needed

Answer 2

My understanding when I first read the question is that it seems quite straightforward : we want to increase our current profit (500M) by 10% in 3 years, meaning simply an increase of 50M in year 3. Of course you could clarify this orally in a real case scenario.

Answer 3

Hi Emily,

Thanks for solving my case! I confirm that the goal is to increase profits by $50M over the next three years. I agree the text is not very clear in terms of that, I will edit it to clarify it, thanks for pointing this out.

Best,

Francesco

Answer 4

Here's a cleaner approach: Given: Revenue = $135MCurrent profit margin = 20% = $27MTarget profit margin = 30% = $40.5... (read entire answer)

Here's a cleaner approach: Given: Revenue = $135MCurrent profit margin = 20% = $27MTarget profit margin = 30% = $40.5MContribution margin = 60%M&S = 15% of total costsStep 1: Ca... (read entire answer)