Can we state that whenever absolute profits are down, margins can never increase?
The other situation, however, is possible: profits are up, margins can increase or decrease depending on situation.
Cheers!
Get Active in Our Amazing Community of Over 452,000 Peers!
Schedule mock interviews on the Meeting Board, join the latest community discussions in our Consulting Q&A and find like-minded Case Partners to connect and practice with!
Margin Generalisation
Overview of answers
Upvotes
Best answer
Hi Anonymous,
you can easily answer it yourself if you start with the definition of your subject:
Margin = Profits / Revenue
Hence, whether margins increase/decrease/stay constant depends on whether the percentage of revenue decline is higher/lower/identical than the profit decline. If revenues have decreased at a stronger rate compared to profits, then the margin increases despite decreasing costs.
Simple example:
- Year 1: EUR 10 million revenue and EUR 7 million costs. Hence profits amount to EUR 3 million (margin = 30%).
- Year 2: Costs have been reduced to EUR 6 million, but also revenue went downhill to EUR 8.8 million. Hence profits have decreased to EUR 2.8 million, while the margin has increased to 32% (2.8 / 8.8).
(edited)
Was this answer helpful?
Hi,
It simply depends what "margin" refers to :
- if it refers to absolute margin then indeed margin don't increase when absolute profits are down
- if it refers to variable margin then margin can increase or decrease whil absolute profits are down
Best
Benjamin
Was this answer helpful?
Hi,
That's not correct. The profits can be down even in the situation of the product margin increase if there is a decrease in volumes
Best,
(edited)
Was this answer helpful?
Related Cases
Company case by Oliver Wyman
I’m thinking about setting up a wine cellar in my basement. The way I see it, shelf space would be divided into two sections: (1) a “drinking” section where I store bottles for my own consumption and (2) an “investment” section where I store bottles that I intend to sell at a profit after they
...
I’m thinking about setting up a wine cellar in my basement. The way I see it, shelf space would be divided into two sections: (1) a “drinking” section where I store bottles for my own consum
...
(Open whole case)
105.0k
Times solved
Beginner
Difficulty
Company case by OC&C
Style:
Unser Kunde, Schmuck Agentur, ist ein führender europäischer Fachhändler für Accessoires und Schmuck. Der Kunde ist derzeit nur in Europa aktiv und vertreibt sowohl Premium- und Luxusprodukte, meist von europäischen Marken, als auch "Mid-Market" Produkte, die eher der hauseigenen Marke angehören. De
...
Unser Kunde, Schmuck Agentur, ist ein führender europäischer Fachhändler für Accessoires und Schmuck. Der Kunde ist derzeit nur in Europa aktiv und vertreibt sowohl Premium- und Luxusprodukt
...
(Open whole case)
13.9k
Times solved
Intermediate
Difficulty
Company case by thyssenkrupp Management Consulting
Your client tk Commodity Trade (tk ComT) is a global materials trader - they buy and sell raw materials. tk ComT had stable EBITDA margins in recent years. They consider expanding their target market and entering the Lithium (electric vehicle battery grade) trade, due to the current high demand for
...
Your client tk Commodity Trade (tk ComT) is a global materials trader - they buy and sell raw materials. tk ComT had stable EBITDA margins in recent years. They consider expanding their targ
...
(Open whole case)
12.9k
Times solved
Advanced
Difficulty
Style:
You have been hired to support the owner of a bike-shop as a business consultant. The bike-shop has suffered a significant revenue decline during the last year, and now the owner would like you to assess the situation and options for the way forward.They want to know last year’s profit, i.e. ho
...
You have been hired to support the owner of a bike-shop as a business consultant. The bike-shop has suffered a significant revenue decline during the last year, and now the owner would
...
(Open whole case)
78.7k
Times solved
Beginner
Difficulty
Style:
Your client is a pharmaceutical company which is worried about the portfolio optimization of their R&D projects.They hired us to investigate it and help them make the most return of their R&D investments in the short and mid-term (without totally forgetting the long-term horizon).How wo
...
Your client is a pharmaceutical company which is worried about the portfolio optimization of their R&D projects.They hired us to investigate it and help them make the most return of thei
...
(Open whole case)
60.4k
Times solved
Intermediate
Difficulty
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers
429
Meetings
5,849
Q&A Upvotes
78
Awards
134 Reviews