Hi,
I got question regarding the goal - 10% increase in profit. Doesn't it mean either revenue increases by 10% of the current profit or cost decreases by 10% of the current profit? Why is it 10% of the current revenue…
Thanks.
Best,
Xin
Hi,
I got question regarding the goal - 10% increase in profit. Doesn't it mean either revenue increases by 10% of the current profit or cost decreases by 10% of the current profit? Why is it 10% of the current revenue…
Thanks.
Best,
Xin
Hi Xin,
Thanks for solving my case.
Regarding your question:
Q: Doesn't it mean either revenue increases by 10% of the current profit or cost decreases by 10% of the current profit? Why is it 10% of the current revenue…
Not necessarily. If costs increase as well when revenues increase, revenues should grow more than 10% of the current profit. This is indeed what happens in this case, where to reach a $6M in growth in profits, revenues have to grow by $120M.
In the case you have:
Given the profit margin is 5%, current profits are $60M.
To reach a 10% increase in profits, we could either increase revenues or decrease costs. However as stated in the case, the profitability cannot be increased, therefore a decrease in cost is not an option.
To reach an increase in profits of $6M with a profit margin of 5%, we should reach an increase in revenues of $120M, which is 10% of the current revenues.
Hope this clarifies, for other questions please let me know.
Best,
Francesco
Hi Xin,
That's exactly right!
I'm not sure exactly what your question is, but if revenues go up 10% that will correlate to a 10% increase in profits. Alternatively, the case could have gone down the route of cost cutting, but it just didn't (a case can go many directions).
Hi Ian, Thanks for your reply. I still don't think in this case, 10% profit increase is equal to 10% revenue increase if the cost remains the same. Let's say we have revenue as 2B, Cost 1B, and Profit 1B. If the Profit increases by 10%, and the Cost remains the same, it will be Profit = 1.1, Cost=1, Revenue=2.1. This means the revenue increases by (2.1-2)/2 = 5%, not 10%. So 10% profit increase is not correlated to 10% revenue increase. Thanks. Best, Xin
Hello Xin,
I see your point, I think the underlying assumption that is needed to reconcile your view with the case solution is that profit margin will be steady. If you make this assumption you have:
Hope it helps,
Luca
Hi Xin,
This is indeed an interesting question which is probably relevant for quite a lot of users, so I am happy to provide my perspective on it:
In case you want a more detailed discussion on how to best prepare your upcoming consulting interviews, please feel free to contact me directly.
I hope this helps,
Hagen
Hi Hagen, Thanks for your reply. I totally agree with you. Just add on top of your comment, if the cost also goes up by 10%, then 10% profit increase is equal to 10% revenue increase. In another word, if the cost is correlated to revenue, then profit increase is correlated to revenue increase. Thanks. Best, Xin
Hi Hagen, thanks for looking at my case. I agree with Xin, I am not sure why you say the percentage should be different - revenues have to grow 10% exactly because variable costs are increasing, given profitability is stable at 5%. Please feel free to check my answer which should hopefully clarify this point
Hi Francesco, sure, I'm always happy to help further improve PrepLounge when there is room for improvement. I feel you slightly misunderstood the situation. The thinking mistake in the case study is that even if profitability is max. 5% (which does not fit business reality), it can still be different, i.e. lower than 5% when revenues increase. Thus, I mentioned the inaccuracy. I highly appreciate that you specify it in the case study. I hope this helps, Hagen
(edited)
Hi Hagen, I see. Actually the case already mentions that profitability is stable at 5% besides that it cannot be increased, hope that clarifies. As apparently that’s not very clear I will remark this more clearly. Thanks again for taking the time to read the case
Hi Francesco, I see your point. Yes I agree that if the cost goes up correspondingly, then the revenue increase and profit increase should be the same in terms of %. I guess I did not understand what it means by "Profit margin: 5%, which cannot be increased". Does this mean that the cost and revenue are correlated, i.e., if revenue goes up by 10%, cost will go up by 10%? Thanks. Best, Xin
Hi Xin, exactly. I will specify this in the case so that it is more clear, thanks for letting me know. Please let me know if you have any other questions. Best, Francesco