In the profitability analysis why we did not subtract the fixed costs from the revenues ?
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Profitability
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Hello,
In profitability analysis, fixed costs are not subtracted from revenues because they are already accounted for in calculating profitability. Fixed costs are expenses that do not vary with the level of production or sales, such as rent, salaries, and utilities. These costs are incurred regardless of whether any revenue is generated.
Profitability analysis focuses on determining the profitability of a business or a specific product/service offering. It examines the relationship between revenues and costs to assess the financial viability and success of the business.
To calculate profitability, fixed costs are considered as part of the cost structure of the business. They are subtracted from the total costs, not from revenues. The formula commonly used to calculate profitability is:
Profit = Revenues - Total Costs
Total costs include both fixed costs and variable costs. Variable costs are expenses that are directly related to the production or sale of goods or services and vary with the level of output.
By subtracting total costs from revenues, you obtain the profit figure, which represents the amount of money left over after covering all costs, both fixed and variable.
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Hi!
Happy to clarify.
Basically, the question asks you to figure out how many years are necessary to ammortize the cost, i.e., when will the company break even considering all this upfront cost that they'll need to suffer e.g., equipment and machinery cost.
To find this out, you first need to figure out what is the operating profit each year (and you figure out it's 2M in step 1). Then, you divide the fixed cost by this operating profit to figure out how many years of this profit will be necessary to make up for all the upfront cost.
This will then give you the final answer.
Hope this made it clearer for you :)
Good luck!
Cristian
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Hi there,
Cristian is exactly right.
Remember that profitability and breakeven have many different pathways/equations to get to the same result. It all depends on the data you have and the information provided versus not provided.
Make sure to get a wide range of practice in these various scenarios!
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Hello, and thanks for the interesting case..
I was having few questions on the Structure, Profitability Analysis and the final recommendation.
Structure:
I took an approach of seeing the issue on 3 different lenses, Quality, Accessibility, and Pricing. Those in your structure, were mostly mentioned as sub pointers. In a McKinsey case would I be affected if i took as this approach? I did not consider any of the social/gov aspect and tbh would not think of it at all in any case.. should I consider it from now on?
Profitability Analysis:
On finding number of packs/boxes.. I have multiplied the Number of Acres by the KG per acre, by 80% (Yield) and lastly, the 90% which was mentioned very early on in the case for Isolate.. why didn't we consider it? or am I wrong on this one?
Another thing on this is I took an approach of finding Gross Profit/Box at first (40$-20$). Would that also affect my answer if I do it in a case? As I have seen you mentioned Profit Margin in the So What.
Lastly, Recommendation:
I have recommended that we go into the market as its a stable 2M Annual Profit, what we can do as next steps is to discuss on our costs and Raw Material costs to get better profitability and breakeven earlier.. Would that also make sense in a case?
I am asking those questions to see what a Partner/Senior Partner would want in an interview as its coming in in few days..
Thanks!
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