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Profitability question

profitability
New answer on Mar 06, 2023
6 Answers
521 Views
Anonymous A asked on Mar 05, 2023

Dear all, 

If revenue increased, but profit decreased, can we conclude that cost must have been increased? what are other possibilities except for increase in taxes, interest, etc? 

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Andi
Expert
updated an answer on Mar 06, 2023
BCG 1st & Final Round interviewer | Personalized prep with >95% success rate | 7yrs coaching | #1 for Experienced Hires

Hi there,

yes, that's the logical inference you can draw, given Profit = Revenue - Cost.

To investigate further, you can break down the cost into its key drivers (varies by company / industry) to pinpoint the problem, followed by targeted root cause analysis.

Feel free to reach out, if you'd like to learn more about how to approach this systematically.

Regards, Andi

(edited)

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Hagen
Expert
Content Creator
replied on Mar 06, 2023
#1 Bain coach | >95% success rate | interviewer for 8+ years | mentor and coach for 7+ years

Hi there,

I would be happy to share my thoughts on it:

  • That is correct. However, what is way more interesting is the root cause of the problem, which might very well still be revenue-related (e.g., changes in product mix from higher- to lower-margin products) or cost-related (e.g., higher fixed costs due to increased production volume).

If you would like a more detailed discussion on how to address your specific situation, please don't hesitate to contact me directly.

Best,

Hagen

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Pedro
Expert
replied on Mar 05, 2023
Bain | Roland Berger | EY-Parthenon | Mentoring Approach | 30% off first 10 sessions in May| Market Sizing | DARDEN MBA

Profit = Revenues - Costs

If profit is down, then cost increased more than revenues. There are no other possibilities (taxes and interest are costs).

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Cristian
Expert
Content Creator
replied on Mar 06, 2023
#1 rated MBB & McKinsey Coach

Hi there, 

Yes, logically speaking the hypothesis is that there's something wrong with the costs. 

The next step would be to go deeper into the costs to figure out what the problem is. Based on the case type/prompt, you can divide cost into:

1. variable/fixed

2. direct/indirect

3. by type of product

4. by type of market

5. etc. - try and get inspired as much as possible by the sort of information that you were provided in the prompt. 

1-2 tend to be the classic structures, but if you can think of something more insightful, that's better.

Best,

Cristian

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Ian
Expert
Content Creator
replied on Mar 06, 2023
#1 BCG coach | MBB | Tier 2 | Digital, Tech, Platinion | 100% personal success rate (8/8) | 95% candidate success rate

Hi there,

Correct! Then, of course, for a real case there will be much more subsequent analysis.

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Anonymous B replied on Mar 05, 2023

I would also dig deeper into the segments that grew as potentially total revenue grew but for the product or client segment with the lowest margin. So it does not necessarily mean that costs have increased but potentially product mix.

Hope that makes sense

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Andi gave the best answer

Andi

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