10% increase in profit

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:

• Revenues: $1.2B
• Profit margin: 5%, which cannot be increased. 

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).

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:

• Actual profits= Actual revenues * Profit margin
• New profits= New revenues * Profit margin = 1.1 * Actual revenues * Profit Margin = 1.1 * Actual profits

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:

• Right in the beginnig of the case study it says "If the candidate proposes to analyze costs, explain the 5% profit margin cannot be increased and redirect him/her to focus on revenues only." As such, the interviewer (re-)directs the case study clearly in the way of revenue increase in order for profit increase.
• Still, I agree with you that both quants and assumptions of this specific case study are somewhat inaccurate. In reality, in order to increase profits by 10% one would need to increase revenues by a different percentage since variable costs will increase as well (not talking fixed-step costs).
• Personally, I would advise you to focus on preparing with case studies from business school case books like Columbia, Darden, Esade, Fuqua, Kellog, LBS, McCombs, Michigan, Ross, Sloan or Yale. Almost all of them are available for free and seldomly contain logical mistakes like in this specific case study.

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