Identifying an issue with profitability of a business.

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2. Profitability Analysis
Increasing Revenues, Decreasing Profits
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3. Business Issue- Profitability
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Assume that an automotive manufacturer’s revenues are
increasing, and overheads are also under control.
However, the profits are declining.
What is the issue?

4. Identification of Issue
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Determination of Profits
Revenue
Volume Selling Price
-
X
Operating Costs
Input Costs (Cost
of Goods Sold)
Overhead
Costs+
=
Operating
Profits
-
Net Profits
Interest,
Depreciation,
and Tax

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Rising Volumes, but Lower Selling Prices
Issues
Three possibilities exist:
1
•In this scenario, the revenues are maintained at higher levels due to
rising volume, but the company might not be able to command selling
prices that would justify the costs involved.
Identification of Issue
• Lower prices could be because of the following:
• Lower prices in the market, forcing the company to do so
• The company has lowered prices to garner market share and cut
competition

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High Revenues, Low Overhead, but High Input Costs2
•In this scenario, the company has not been able to maintain the input
costs (cost of raw material, direct labour, and other manufacturing
expenses). This has led to a dip in the operating profits.
High Interest, Depreciation, or Tax3
•Another possibility could be the expense due to interest, depreciation
or higher taxes that could lower the net profits.
Identification of Issue

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sandeep.sharma@skillscape.co
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