Question

The following is from an article from the Wall Street Journal: “Krispy Kreme Doughnuts Inc. reported its profit fell 56% in its second quarter despite an 11% increase in revenue.” Briefly explain how it is possible for a firm’s revenue to increase at the same time its profits decrease

Answer 1

Revenue is the total amount of income generated by the sale of goods or services related to the company's primary operations. Profit, typically called net profit or the bottom line, is the amount of income that remains after accounting for all expenses, debts, additional income streams and operating costs.

It is quiet possible that revenue of firm may increase but profit may decrease at the same time:

• It is possible to have increased sales revenues and suffer a profit decrease. This can occur if the sales increase comes from higher sales of low-margin items while you suffer a decrease of sales of high-margin products. A low margin business is one that can lead to a higher product turnover. Low margin products sell for very close to the price that it costs the company to either purchase or make it. High-margin products give a high level of profit compared to the amount of money spent on doing them, producing them.
• Another common reason for a decrease in profits is rising costs. The sales for a particular revenue may be high. But at the same time the manufacturing and overhead expenses may increase. This will result a decrease in profit. For Example Let us suppose Sales for last year were $50000 and Overhead and Manufacturing Expenses were $25000. Then Profit = Sales - Expenses = $50000 - $25000 = $25000. Let us suppose in the current year the Sales increased to $60000 and Manufacturing and Overhead Expenses increased to $45000. Then Profit = $60000 - $45000 = $15000. So, inspite of increase in revenue the profits have declined.