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