L.E.K. case interview: explain the numbers.

Practise a profit comparison, a sizing and pricing question, and a logic exercise. Before solving each, state what you need to establish and why.

The brewery question is useful because similar revenue does not guarantee similar profit behaviour. The market-sizing question is useful because estimating potential customers and deciding what to charge are different tasks. Those are business distinctions worth practising, rather than treating the examples as answers to memorise.

Here is an original exercise that develops the first distinction.

Two furniture companies each earn £1 million in annual revenue and £150,000 in operating profit. One outsources production; the other runs its own factory.

Assume prices and product mix stay constant, variable costs move proportionally with sales, and fixed costs remain unchanged over the range being analysed.

The question is: which company's profit is more exposed to a fall in demand?

You can see the mechanism before calculating. The owned factory keeps more contribution from each sale, but carries a larger fixed bill. Falling revenue removes contribution while that fixed bill remains.

Revenue falls by 20% to £800,000.

The outsourced company's variable costs become £600,000. After £100,000 fixed costs, profit is £100,000.

The factory owner's variable costs become £360,000. After £400,000 fixed costs, profit is £40,000.

Both lost £200,000 in revenue. One lost £50,000 in profit; the other lost £110,000. The difference follows from their contribution margins: 25% versus 55%.

A useful explanation is:

“The owned factory is more sensitive to demand because its larger fixed cost base remains when sales fall. A 20% revenue decline reduces its profit by about 73%, compared with about 33% for the outsourced business.”

Do not stop at “fixed costs are high.” Explain how the revenue change flows through the cost structure. That is what makes the analysis transferable to a different industry.

It would be premature to recommend outsourcing everything. At revenue of £1.2 million, the outsourced company earns £200,000; the factory owner earns £260,000. The same structure that hurts on the downside helps when demand grows.

You can also find where the two profit lines cross:

• Outsourced profit = 25% × revenue − £100,000.
• Factory profit = 55% × revenue − £400,000.
• Equal profit requires 30% × revenue = £300,000, so revenue = £1 million.

Above that level, the factory model earns more under the stated assumptions. Below it, outsourcing earns more.

Now the recommendation can reflect the client's demand outlook, risk tolerance and operational requirements. If sales are volatile, flexible capacity may be valuable. If demand is stable and growing, giving away contribution to remove fixed costs could reduce long-term profit.

Suppose the interviewer asks how the factory owner could reduce its exposure. You might consider outsourcing some production, using flexible labour, sharing capacity or securing more stable demand through contracts.

For each option, ask which costs change and when. Outsourcing production does not help much if the factory lease, equipment payments and salaried workforce remain while the company also pays an external producer.

A stronger recommendation specifies the decision:

“I would first assess how much of the fixed cost can be avoided within the planning period. If most is committed, I would focus on filling spare capacity and making future expansion more flexible, rather than assuming an immediate outsourcing saving.”

That answer connects the model to implementation. It also shows you can revise a superficially attractive idea when the economics do not support it.

For a market-sizing case, define the customer, geography, period and unit first. Build an estimate from drivers you can explain. If you estimate buyers, converting them into annual revenue still requires purchase frequency and price.

For pricing, examine what value the offer creates, the alternatives customers can choose, willingness to pay and the economics of serving them. A large addressable population does not tell you that customers will buy at your proposed price.

For profit, account for the costs needed to reach and serve those customers. Use the market-sizing guide to practise building the estimate, then deliberately add a pricing or profit question so the exercise ends in a business decision.

Work through an official prompt aloud before looking for a solution. Write the relationship you plan to calculate, label units and explain the result. Have your partner change one input and ask what should happen before you recalculate.

For the furniture example, increase variable costs, make part of the factory bill avoidable or introduce a capacity ceiling. You should be able to predict the direction of the effect and then verify it.

Prepare your experience discussion with the same discipline. Explain the problem, your role, a consequential choice and the result. For “Why L.E.K.?”, connect work you have researched to the kind of analysis and client problems you want to pursue.

Finish preparation with an unfamiliar practice case. Your target is a recommendation that survives a follow-up question because you understand the model, rather than one that sounds polished only on the first attempt.