Found this in the interview database. How would you answer the following question:
Rank the following in terms of biggest impact on net income: 20% increase in sale price, 20% increase in sales volume, 20% decrease in costs.
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I may be over thinking this, but it really depends on the company's cost structure. One way to think about this is actual dollars and margins. For instance, a company whose operating costs are over 50% of revenue will have a much larger benefit of lowering costs by 20% than a company a very lean cost structure. You can also consider the % of fixed/variable costs can affect how much of a volume increase has on the business (i.e., margins can increase at higher volumes due to leveraging fixed costs.)
Unless knowing more, my short answer would rank 1) sale price increase; 2) sale volume increase and 3) costs decrease (most to least impact). Assuming there is no decrease in volume associated with raising prices, an increase in price will drive up revenue while costs remain the same, i.e., your profit would be up a true 20% in theory. Next is volume increase - 20% increase should drive revenue up 20% (assuming no discount in price) but you won't see a full 20% increase on your profit due to some COGS associated with that volume (even if your operating costs are 100% fixed). Lastly is cost decrease, and this one is the most sensitive to your assumptions around cost structure. I think a good, strong-margin business stands to benefit more from a 20% volume increase than a 20% cost decrease. The cost decrease can have more impact than the volume increase if there is a larger cost structure (in theory, it can have more impact than the price increase too if total costs exceed total revenue). Bottom-line, there likely needs to be some kind of margin enhancement associated with increasing sales volume for it to outrank the cost reduction. Also good to note the first two grow the business's top-line while the third is something you can always address later :-)
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