Indirect costs per unit remain constant implications

Question

I believe there is a detail overlooked on the case information. It is mentioned that indirect costs per unit remain constant. As this is an allocated metric it must mean that indirect costs have increased (to maintain the same cost per unit with an increased ammount of units sold). As this business has a considerable portion of indirect costs (33%) those indirect costs could also be playing a role on profit margin decline (on top of the effect of selling more of a less profitable product).

Shouldnt we be expected to at least ask about what are the changes on indirect costs to evaluate if any low hanging fruits there could also help to bring profit margins back up?

Answer 1

Hello Marcelo,

You raised a good point but if you read carefully the text, the problem of your client is not the absolute value of the margin, but the profit margin. For this reason, the fact that incidence of the indirect costs per unit has not change, means that the problem of the lower profit margin is something else.

That being said, your point is good and it would be nice to tell your interviewer that you identified this new room for efficiency (I would recommend at the end of the case). Please be aware that indirect costs are not always completely not correlated to the sales. For example, in this case the increase in the sales could be caused by a new and more expensive marketing campaing. In that case it would not be so obvious that you could cut these costs to increase your profit.

Hope it helps,

Luca