Required Revenue Increase

Question

I want to ask a question about the required revenue increase that we've calculated here as 6.67% for this question.

I understand that the total costs for closing commission and trailing commission are 5% each (as a percentage of the OPM).

We then calculated that if costs are increasing at a rate of:

5%/3 (due to trailing costs being over a 3 year period totalling 5%) + 5% (fixed closing commission) = 6.67%

that the revenue also must go up by 6.67% to cover the rise in operating costs.

How is this revenue increase also the same as the increase in the costs?

If you look at the formula, OPM is calculated as (gross profit - op. cost) / total revenue, so to calculate the total percentage change in the numerator, I'd need the raw gross profit figure first to figure the decrease change in the numerator and then know how much the denominator (i.e. the total revenue) needs to increase by to cancel the change.

Appreciate any feedback or corrections in advance!

Answer 1

Hi there,

Thank you very much for this question. I would be happy to share the solution to it:

Under the assumption that the operating profit margin (i.e., (revenues - operating costs) / revenues) stays constant, in order to cover the costs of the incentive program, revenues need to increase by the same percentage as operating costs increased.
Moreover, please keep in mind that commissions are indicated as a percentage to operating profit, not operating profit margin.

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

Hello,

I see you already got an answer here, so just an additional piece of advice:

Per Hagen's answer, it seems like the reasoning behind the required revenue increase here hinges on an assumption (i.e., under the assumption that the operating profit margin stays constant).

This is an assumption made in the case, it is not self-evident. As you point out, there's no obvious reason for the revenue increase to be the same as the cost increase ex-ante, without this assumption. So whenever you hear/see/make assumptions like this during a case, be sure to keep track of them to prevent confusion later on in the case.

Answer 3

Hi there,

Of course Hagen can best answer his own case :)

When you're case prepping, make sure you're getting very clear on the nuance between terms. Percentage versus percentage points, profit versus margin, return on investment (across multiple years) versus goal of growth revenues (in a given year)!

Answer 4

Hi there!

I see you already got the answer below!

In case you are struggling with some of the terms, here is a guide that synthesises all of the most common terms that you should know for consulting interviews:

Free Guide: The Must-Know Consulting Terms for Interviews

Best,
Cristian

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Answer 5

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