Lower increase in total sales means change in sales mix or decreased units sold (via income statement analysis)?

Question

In exhibit 2 there is an income statement that shows that distribution costs increased by 64% while total sales didn't increase by the same percentage (although marginal increase).

This means that the sales mix has changed a lot to favour products with lower profit margins.

However, couldn't it also mean that due to energy inflation, distribution costs increased but these prices were not passed to the consumer, meaning that they were still cheap and required a price increase?

Couldn't it also mean that fewer units of the products were sold as distribution costs are purely applicable to the total cost of delivery of products from the wholesaler and are not directly linked to the products sold as per the accrual based system of accounting?

Answer 1

Hi there,

Thank you very much for this question. I would be happy to share my thoughts on it:

First of all, while the case study was developed prior to the events at the beginning of this year, with the current real-life economic environment, you are right that another plausible scenario could be rising energy prices, which led to increased distribution costs.
Moreover, generally speaking, I would advise you to present all plausible root causes that might have led to these changes in the financial figures in such a situation.

If you would like a more detailed discussion on how to best prepare for your upcoming interviews, please don't hesitate to contact me directly.

Best,

Hagen

Answer 2

Hi there,

Absolutely! When situations like this cocur, you absolutely want to double-check and use your judgement to check assumptions.

Answer 3

Hi there!

You're correct in assuming that the changes could come from multiple sources.

And in an interview, you should do exactly this - communicating to the interviewer in a structured manner what are all the possible, data-driven hypotheses that you could launch from each point.

In terms of how to structure it, I'd recommend you start by picking a relevant data point, explaining what it means (i.e., what is the take-away), then explaining what are the implications for the client (recommendation / hypothesis / next steps).

Best,
Cristian

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