Cost Structure Analysis · Interview Question
A manufacturer's gross margin fell from 40% to 32% over two years while revenue stayed flat. What are the likely drivers?
How to answer
With flat revenue, the problem is cost-side. Investigate: (1) Raw material costs — have commodity prices risen? Check input price indices. (2) Labor costs — wage inflation, overtime, or productivity decline? Calculate output per labor hour. (3) Product mix shift — are you selling more low-margin products? Weight margins by SKU mix changes. (4) Manufacturing efficiency — has yield decreased? Scrap/waste rates? (5) Supply chain costs — freight, logistics cost inflation? (6) Pricing pressure — are you giving deeper discounts that show up in net COGS? Quantify: an 8-point margin decline on flat revenue means absolute cost increase = 8% of revenue. Identify which lines account for that 8%.
Key idea: Revenue flat means it's a cost problem. Decompose COGS line by line.
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