Retail profit bridge: why selling more can earn less

You ask for sales volumes, prices and costs on the same basis. The interviewer shares Exhibit 1: operating drivers for the same product across two comparable periods. Variable cost includes all costs that change with each unit sold; fixed cost and the accounting boundary are unchanged.

Calculate revenue, contribution and operating profit for both periods. Then explain why profit changed without treating the extra revenue as extra profit.

Earlier contribution per unit is £20 − £12 = £8. Operating profit is 100 × £8 − £300 = £500.

Current contribution per unit is £19 − £13 = £6. Operating profit is 110 × £6 − £300 = £360.

Profit falls £140, or 28%, despite a 10% increase in units sold. Revenue rises from £2,000 to £2,090, up £90 or 4.5%.

The issue is visible: each sale now leaves £2 less contribution. The additional ten sales do not make up for the weaker economics across the whole volume.

The table below is a profit bridge calculated from Exhibit 1. Change volume at the earlier unit economics, then change price and unit cost at the current volume; no new input figures are introduced.

The bridge makes the finding easy to explain: price and cost deterioration remove £220, overwhelming the £80 volume benefit in this calculation order.

The key is that the changes reconcile. A bridge that ends at £380 or £340 has lost or double-counted an interaction.

You could apply the price and cost changes to the original 100 units first, then value the extra ten units at the new £6 contribution.

That gives −£100 for price, −£100 for unit cost and +£60 for volume. The total is still −£140.

Both orders are valid. They allocate the interaction between volume and unit economics differently. State your order and avoid treating the individual bridge bars as uniquely determined causal effects.

For the interview, there is no need to calculate both unless asked. Choose one transparent route, reconcile it and explain the business movement.

The manager wants to recover the previous £500 profit while keeping the current £19 price and £13 unit cost. Required volume is:

(£500 target profit + £300 fixed cost) ÷ £6 contribution = 133.33 units.

The business needs 134 whole units to meet or exceed the target, producing £504 profit. That is 24 more units than the current 110, about 21.8% additional volume.

Before recommending that volume increase, ask how much the business can supply. The interviewer adds a capacity limit of 125 units with no change in fixed cost. Even selling every available unit gives 125 × £6 − £300 = £450, still £50 short.

The growth-only plan cannot reach the target within that capacity. You have a reason to investigate price or unit cost, rather than repeating the original revenue-growth recommendation.

At 125 units, achieving £500 profit requires (£500 + £300) ÷ 125 = £6.40 contribution per unit.

Compared with the current £6, the retailer needs another £0.40 per unit. That could come from a £0.40 net price improvement, a £0.40 variable-cost reduction or a combination, provided the volume and capacity assumptions still hold.

At the current 110 units, restoring just the old price or just the old unit cost would produce £7 contribution and £470 profit. Either helps, but neither alone restores £500 at that volume.

These thresholds show how much improvement the next analysis must find. Check the operating constraints before treating the arithmetic as an achievable result.

The bridge tells you where profit changed. To choose a lever, ask what drove those changes.

For price, inspect discounts, customer mix and competitive response. A lower realised price might reflect more promotions rather than a lower list price. For unit cost, inspect input prices, fulfilment cost, yield or changes in order size.

Then test the proposed action with demand. Restoring the old price may lose some volume; reducing packaging cost may affect returns or damage. Include the relevant response when the case supplies it rather than assuming each lever is independent.

A strong response is:

“Profit fell £140 because lower price and higher unit cost outweighed the gain from ten additional sales. At today's £6 contribution, the £500 target needs 134 units, above the 125-unit capacity. I would investigate discounting and variable cost; at full capacity we need another £0.40 contribution per unit to recover the target.”

Try the fashion inventory exhibit drill to practise turning a retail exhibit into a focused commercial action. For the wider diagnostic method, read profitability frameworks.