Cost Structure Analysis · Interview Question
A manufacturing company's COGS increased from 55% to 65% of revenue over 3 years. What are the likely drivers?
How to answer
A 10pp increase in COGS/revenue is massive. Investigate: (1) Input cost inflation — raw materials, energy, or labor costs rose (check commodity indices), (2) Volume decline — if revenue dropped, fixed manufacturing overhead is spread over fewer units, raising per-unit COGS, (3) Product mix shift — selling more low-margin products, (4) Supply chain disruption — emergency sourcing, expedited shipping, (5) Manufacturing inefficiency — lower yields, higher scrap rates, (6) Pricing pressure — revenue denominator shrank due to discounting while costs held steady. Quantify each: e.g., if raw materials are 40% of COGS and rose 15%, that explains 6pp of the 10pp increase.
Key idea: Decompose COGS into components and check what drove each one
Related Cost Structure Analysis questions
- A B2B software product saves clients $500K/year. How would you set the price using value-based pricing?
- A client's revenue per customer is rising but total revenue is falling. What's the most likely explanation?
- A company has $5M in fixed costs and a 40% contribution margin. What's the break-even revenue?
- A company has 40% gross margins but negative EBITDA. Where would you look?