The Four Main Variables for Profitability
The cost of products sold, selling price, sales, and costs are the four main variables that determine whether a company is making a profit or a loss. A change in just one of them can have positive or negative effects on the company, but several of them need to alter significantly for there to be a noticeable shift in the profitability level of an organization.The Impact of Reduced Product Costs
According to the horizontal study, sales were down while gross profit was up. Reduced product costs is one element that might have had a role in that. When the price or raw materials and cost of labor involved in production process goes down, the profit margin will eventually peak (Sawyer, 2015).The Effects of Decreased Sales
Therefore, if there is a fall in the sales by four percent and a decrease in cost of goods with a percentage that leads to a higher amount than that of sales, then the gross profit will be high. The other factor is an increase in the selling price of the goods. The number of sales may go down as a result of the increased cost of commodities, but if the additional price brings more returns than the loss caused by the decreased sales, then the gross profit will undoubtedly rise (Lachapelle et al., 2016).The Impact of Business Expenses
There are always expenses that have to be incurred by a business organization before the goods reach the customers, for instant transportation costs or product promotion. They also affect the profit margin of a company especially when they are high (Schaltegger et al., 2017). Therefore, for a company with a reduced number of sales and with an increase in gross profit, assuming the price and cost of goods remain constant, the expenses will have to reduce considerably.Combination of Factors for Massive Gross Profit
Combination of two or all the factors that increase profit with decreased sale leads to massive gross profit realization in an organization.Reference
Sawyer, T. Y. (2015). Cost of Goods Sold and Inventory Model: Plot Your Costs and Margins. In Financial Modeling for Business Owners and Entrepreneurs (pp. 105-126). Apress.
Lachapelle, A., Lasry, J. M., Lehalle, C. A., & Lions, P. L. (2016). Efficiency of the price formation process in presence of high frequency participants: a mean field game analysis. Mathematics and Financial Economics, 10(3), 223-262.
Schaltegger, S., & Wagner, M. (Eds.). (2017). Managing the business case for sustainability: The integration of social, environmental and economic performance. Routledge.
