Revenue Up 20%, Costs Up 30%: What Happens to Profit?
Consulting case study on combined changes in revenue and costs
The riddle
A company has revenue of €1,000 and costs of €800, so a profit of €200. The following year, its revenue rises by 20%, but its costs rise by 30%. What does its profit become, in euros and as a percentage change?
Need a hint?
Recalculate each amount separately, applying its own increase to each, before taking the difference.
Show the answer and the solution
Answer: Profit falls to €160 from €200, a 20% decline, even though revenue increased.
The reasoning
The new revenue is 1,000 × 1.20 = €1,200. The new costs are 800 × 1.30 = €1,040. Profit therefore becomes €1,200 minus €1,040 = €160, instead of €200. The change is (160 - 200) / 200 = -20%. Revenue grows by 20%, but profit falls by 20% because costs rose faster than sales. A rise in revenue does not guarantee a rise in profit, so you must compare the growth rates of revenues and costs.
What next?
Reasoning improves like memory: by practising often. Next, test yourself on our general knowledge quizzes.