Is it an appropriate comment to make that one way to improve profitability is to increase volume sold, because as gross profit increase, client will improve their profitability in the operating margin level, provided no incremental increase in fix cost with additional volume sold.
Of course this is on top of the option to increase price and cut down costs
How to increase profits:
But you have to understand this is very simplistic. There are many ways to increase volume, prices and to reduce costs ;)
Hi there,
Yes, absolutely you can!
Profitability (not profits) can be grown through price increases, prodeuct mix changes, absolute cost reductions, AND scale advantages (i.e. economies of scale from increasing volume)
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Hey there,
Yes, such an answer with proper explanation and justification (on top of price increase or cost reduction) would be considered insightful and creative, thereby lifting your evaluation upwards.
Cheers,
Florian
Yes, that is correct - if you take profitability as equivalent to profit margin, you can increase it by selling more units exactly due to the reason you describe.
Your conceptual understanding is correct.
You might want to rephrase it in a simpler manner - the sentence is a bit convoluted right now.
Hi!
It is true but I would make it more specific, i.e. go one-two layer down your structure and tailor your recommendation to the case and client.
Best,
Anto
Yes profitability tends to increase when volumes rise. In addition to what you stated about average fixed costs per unit falling, you may also lower your variable costs per unit. For example, when you buy materials in bulk, you can get them at a cheaper price per unit (one example of economies of scale)
Yes, this is spot on!
Hi Pedro, when a case objective was to improve profitability, wasn't it supposed to increase the margin instead of the absolute profit?
That is a good clarification question to ask the interviewer. I usually consider profitability as related to ROE or ROA, i.e., making more profit with the same asset base, which is what I am doing above. Now, if you consider only average margin, you have an additional option, which is to stop selling lower margin products. If you remove products whose contribution margin is below average margin, then your margin will go up. Unfortunately, your absolute profit will go down. I don't see why a company would want to do that...
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