2002 CBS Casebook_31 - - Increase/decrease in sales to...

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Frameworks Columbia Business School Management Consulting Association Guidebook 2002 Please do not duplicate, copy, print or photocopy 31 THE PROFIT EQUATION Simple, but invaluable when asked to explain changes in profitability. Profit = (Quantity x Price) - Costs There are three drivers of profitability: sales volume (quantity), price and costs. When doing a case that involves a change in profitability, you must determine which of these elements have changed, and then determine the causes of those changes. Issues related to each of the three that must be examined are: Price - Consumer demand elasticity - Competitors’ price changes - Market power – can we charge a premium? Have we lost a previous ability to charge a premium? - Product differentiation Sales volume (quantity) - Loss of market share due to competitors’ actions - Growth/reduction in overall market
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Unformatted text preview: - Increase/decrease in sales to current customers with current products - Increase/decrease in sales to current customers with new products - Increase/decrease in sales to new customers with current products - Increase/decrease in sales to new customers with new products Cost - Portions which are fixed and variable - Time frames in which costs are avoidable - Allocation of costs to product, overheads etc. Note: changing volumes can wreak havoc on profitability when looked at from the perspective of fixed vs. variable costs. Be sure to understand what happens to fixed cost per unit when volume declines (it increases) and how this can affect profitability in capital intensive businesses. Click to buy NOW! P D F-X C ha ng e V ie w e r .d o cu-tr ac k .c m...
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