Question

Sony has failed to meet its own initial operating profit forecast. What are three things Sony can do to fix this? Be sure to list the pros and cons of said three options and choose the best option and explain why you made that choice.

Answer 1

Operating profit is the earnings before interest and taxes (EBIT).

Revenues	***
Less: Cost of goods sold (COGS)	***
Gross profit	***
Less: Operating expenses (such as rent, depreciation, salaries, sales commission, etc.)	***
Operating profit or EBIT	***

If operating profit is already forecasted but could not be met with actual figures, the following things are to be done:

No.1) Increase in selling price: The shortfall of operating profit could be managed by increasing sale price next time.

No.2) Lower quality materials: it reduces cost of goods sold, since lower quality material has lower price to pay. Once cost of goods sold decreases, it increases operating profit.

No.3) Reduction in operating expenses: Few unnecessary expenses could be eliminated or minimized (such as travelling expenses are restricted for employees). It increases operating profit.

Pros:

No.1) Increasing the selling price for increasing the operating profit is the way which doesn’t disturb company’s internal set-ups, like COGS or operating expenses.

No.2) COGS is the big part of expense. Therefore, a little decrease in quality may have huge cost reduction and increasing profit.

No.3) Finding those unnecessary operating expenses create one type of internal audits. These expenses are not direct; therefore, minimizing or eliminating those becomes easy.

Cons:

No.1) The company may lose the market share if price increases.

No.2) If lower quality of materials are used, the company may lose brand image and goodwill in the market.

No.3) This is almost flawless; although sometimes departments oppose for curtailing their costs (such as sales persons are against the reduction of sales commission).      

Reduction in operating expense is the best, since its cons are not so heavy and pros are huge.