A Real Increase in Profitability?

The table below highlights a firm that has dramatically increased its profitability in a few years. But they have focused on a short-term, not long-term, basis and you need to determine what impact this may have.



Year 0 Year 1 Year 2 Year 3
Sales 20m 19.50m 18.6m 16m
Costs 5m 4.75m 4.6m 4m
Operating profit 15m 14.75m 14m 12m
New product development 2m 1m 0.5m 0m
Promotional expenditure 4m 3m 2.5m 1m
Sales force commissions 2m 1.75m 1.5m 1m
Total ‘future’ investment 8m 5.75m 4.5m 2m
Net profits 7m 9m 9.5m 10m



  1. Based on the bottom-line net profits figure only, how happy would the firm be with these results?
  2. Essentially, how has the firm been able to deliver these profit results?
  3. What concerns do you have for the firm? Do you see their profitability continuing to increase?
  4. What advice would you have for the management of this firm?