The Shop's Quarterly Margin Squeeze
A small retailer sells three products. Last quarter: Product X sold 1,200 units at €15 each with a cost price of €9; Product Y sold 800 units at €22 with a cost price of €14; Product Z sold 500 units at €40 with a cost price of €28. Fixed overheads were €9,600 for the quarter. This quarter, unit costs rise 10% across all products, selling prices are held, and volumes fall 15% on every product. The owner says 'we only need to sell a bit more to make the same profit.' The accountant disagrees, pointing to the margin percentage rather than the absolute margin.
1. Calculate last quarter's total profit.
Read the worked answer
Product X: margin per unit = 15 − 9 = €6; total = 6 × 1,200 = €7,200. Product Y: 22 − 14 = €8; total = 8 × 800 = €6,400. Product Z: 40 − 28 = €12; total = 12 × 500 = €6,000.
Gross margin = 7,200 + 6,400 + 6,000 = €19,600. Less overheads €9,600 → profit = €10,000.
2. Calculate this quarter's profit after the 10% cost rise and 15% volume fall.
Read the worked answer
New costs: X = 9 × 1.10 = €9.90; Y = 14 × 1.10 = €15.40; Z = 28 × 1.10 = €30.80. New margins: X = 15 − 9.90 = €5.10; Y = 22 − 15.40 = €6.60; Z = 40 − 30.80 = €9.20. New volumes: X = 1,200 × 0.85 = 1,020; Y = 680; Z = 425.
X: 5.10 × 1,020 = €5,202 Y: 6.60 × 680 = €4,488 Z: 9.20 × 425 = €3,910 Gross margin = €13,600. Less overheads €9,600 → profit = €4,000.
3. Evaluate the owner's claim that 'a bit more volume' restores profit. How much extra volume (as a percentage) on the new margins would be needed to return to €10,000 profit?
Read the worked answer
Shortfall in gross margin = 19,600 − 13,600 = €6,000. Current gross margin €13,600 must rise to €19,600 → factor = 19,600 ÷ 13,600 = 1.441.
That is a 44.1% increase in volume (on top of the 15% already lost, i.e. volumes would need to exceed last quarter's levels).
The owner's 'a bit more' is wrong - the required uplift is large because margin per unit fell while overheads stayed fixed. The accountant's margin-percentage point is the correct lens.