Declining Factory Profits Case Study
The Profit Problem Every Factory Faces
Your plant reports €10M annual revenue but profits dropped 20% from €1.2M to €960K. Is it pricing pressure, scrap waste, labor inefficiency, or overhead creep?
Income Statement Crash Course (2 Min)
- Revenue: €10M = Price × Volume × Mix
- COGS: €7.5M = Materials + Labor + Overhead (75% of revenue)
- Gross Margin: €2.5M = €10M - €7.5M (25%)
- Operating Expenses (SG&A): €1.54M
- EBIT (Operating Profit): €960K
Exercise Step 1: Gross Margin — Step-by-Step Guide
Step 0
📊 Your Data
Current Year
Revenue€10,000,000
COGS€7,500,000
Last Year
Revenue€10,000,000
COGS€7,000,000
Revenue vs. COGS (€M)
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Step 1
📋 3 Questions — Try Before You Scroll
- 1Gross Profit: Revenue − COGS = ? for both years. What is the €K difference?
- 2Gross Margin %: (Gross Profit ÷ Revenue) × 100 = ? How many points did it shift?
- 3Root Cause: Revenue is flat — so what caused the €500K profit drop? COGS or Revenue?
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Step 2
✅ Correct Answers
Current Year
Gross Profit
€2.5M
€10M − €7.5M
Gross Margin
25%
Last Year
Gross Profit
€3.0M
€10M − €7.0M
Gross Margin
30%
Gross Profit & Gross Margin — Year-over-Year
Q3 Answer: The €500K gap is 100% driven by COGS (+€500K). Revenue held perfectly flat at €10M both years.
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Step 3
🔍 Gap Analysis
| Metric | Current | Last Year | Δ |
|---|---|---|---|
| Revenue | €10.0M | €10.0M | → €0 |
| COGS | €7.5M | €7.0M | ↑ +€500K |
| Gross Profit | €2.5M | €3.0M | ↓ −€500K |
| Margin % | 25% | 30% | ↓ −5 pts |
Profit Waterfall — Where Did €500K Go?
Revenue: flat — not the problem
COGS: +€500K — the entire gap
Margin: 30% → 25% — 5pt erosion
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Step 4
The Factory Manager Rule
When Revenue is flat and Profits are down, you have a COGS emergency — not a pricing problem.
Skip the sales debate. Open the factory floor.
Revenue Flat + Profits Down = COGS Emergency
📦 Break down Scrap
👷 Analyse Labour variance
⚙️ Review Overhead
Step 2 Actionable Fixes — Detailed Math
📦 Scrap Reduction: FPY 90% → 95%
Current scrap10% × €4.5M = €450K waste
Target scrap5% × €4.5M = €225K waste
Savings€450K − €225K = €225K
✅ Annual Saving: €225K
Current FPY90%
Target FPY95%
Scrap Cost — Current vs. Target (€K)
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👷 Labour Efficiency: Overtime −50%
Total labour€1.8M (incl. €100K overtime)
OT premium50% above base rate
OT saving−50% overtime = €50K
ProductivityAdditional gain = €25K
Total€50K + €25K = €75K
✅ Annual Saving: €75K
Labour Cost Breakdown (€K)
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⚙️ Overhead Absorption: Two Options
Option A vs. Option B — Savings (€K)
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📊 Total EBIT Impact
| Fix | Annual Saving |
|---|---|
| Scrap Reduction | €225K |
| Labour Efficiency | €75K |
| Overhead Fix (B) | €180K |
| EBIT Recovery | €480K (+50%) |
| 🏆 Total New EBIT | €1,440K |
EBIT Waterfall — €960K → €1,440K
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🏭 The Bottom Line
€480K profit recovery — zero new revenue required.
Three operational levers. One factory floor. Six months to implement.
€960K EBIT → €1,440K EBIT | +50% improvement
📦 Scrap −50% → €225K
👷 Labour OT −50% → €75K
⚙️ Overhead −15% → €180K
Why Partner with HNG Consulting?
Profitability diagnostics
Identify Profit leaks in COGS, pricing, overhead absorption within 2 weeks.
MBB frameworks
Strategy consulting methods adapted for factory managers - profitability, capacity, pricing cases.
90-day execution
Financial insights → shop-floor KPIs → Measurable EBIT improvement guaranteed.