Business Profit Analysis: Case Study Calculations
a) Define Fixed Costs
Fixed costs are expenses that do not change with the level of output or sales volume in the short run. Razia must pay for items such as her car lease, insurance, and other overheads even if she runs fewer courses.
b) Define Sales Volume
Sales volume is the total quantity of units sold by a business during a specific period. In this case, the unit is a 1-day training course; Razia sold 200 courses in 2016 and 150 courses in 2017.
c) Calculate the 2016 Business Profit
Revenue: 200 courses × CAD 600 = CAD 120,000
Variable cost per course:
- Room hire: CAD 150
- Refreshments: CAD 150
- Training materials: CAD 50
- Other variable costs: CAD 50
Total variable cost per course = CAD 400
Total variable costs = 200 × 400 = CAD 80,000
Fixed costs:
Car lease (5,000) + Insurance (1,000) + Other fixed costs (2,000) = CAD 8,000
Profit Calculation:
Profit = Revenue − (Variable Costs + Fixed Costs)
Profit = 120,000 − (80,000 + 8,000) = CAD 32,000
Answer: The business made a profit of CAD 32,000 in 2016.
d) Methods to Increase Sales Volume
- Targeted Promotion: Razia could continue advertising on Urdu-language websites, community groups, mosques, and local business networks. This increases awareness among the roughly 90,000 Pakistanis in Toronto, generating more enquiries. Higher enrolment spreads fixed costs across more units, improving the average cost per course.
- Pricing Incentives: Razia could offer early-booking discounts, group discounts, or a lower introductory price. Because demand appears price-sensitive, a lower effective price may attract entrepreneurs previously discouraged by the CAD 900 fee. Higher enrolment increases total revenue if the volume gain outweighs the lower price per booking.
e) Assessment of Price Increase Strategy
Razia’s objective was to increase profit by 10%. With a Price Elasticity of Demand (PED) of −1.2, demand is price elastic, meaning a price rise typically causes a proportionately larger fall in quantity demanded.
Performance Comparison:
- 2016 Revenue: 200 × 600 = CAD 120,000
- 2017 Revenue: 150 × 900 = CAD 135,000
In 2017, variable costs per course rose to CAD 500, totaling CAD 75,000. Fixed costs increased to CAD 12,000. Therefore, 2017 profit was 135,000 − (75,000 + 12,000) = CAD 48,000.
Compared to the CAD 32,000 profit in 2016, profit increased by 50%, significantly exceeding the 10% target. While the fall in sales volume confirms price sensitivity, the higher price more than compensated for the lower volume, proving the strategy successful under current market conditions.