Sales Down 10%, Operating Profit Down 40%: Test the Fixed-Cost Assumptions
By the MerlaTech team behind SignalSage. Original fictional examples; AI-assisted illustration and writing.
A 10% sales decline does not necessarily imply a 10% decline in operating profit. A company still has to cover costs that do not shrink with that quarter's sales. This worksheet isolates that effect with three transparent scenarios, so the assumptions are easy to challenge.
One cost structure, three scenarios
Assume sales change only because volume changes. Selling price, product mix and variable cost per unit stay unchanged. Total variable costs are therefore 60% of revenue. Fixed operating costs remain $30 million throughout the illustrated range. All figures use the same annual period and currency.
| USD millions | Downside | Base | Upside |
|---|---|---|---|
| Revenue | 90 | 100 | 110 |
| Variable costs | 54 | 60 | 66 |
| Fixed costs | 30 | 30 | 30 |
| Operating profit | 6 | 10 | 14 |
Base: 100 − 60 − 30 = 10. Downside: 90 − 54 − 30 = 6. Upside: 110 − 66 − 30 = 14. Relative to the base, revenue changes by −10% or +10%, while operating profit changes by −40% or +40%. These are changes in operating profit, not shareholder returns.
Why the percentages differ
The base leaves 40 after variable costs; 30 of that covers fixed costs, leaving 10 of operating profit. Losing 10 of sales saves 6 of variable costs but leaves 4 less to cover the same fixed costs. That 4 is 40% of the original profit of 10. In this simplified model, base operating leverage is 40 / 10 = 4. The concept describes sensitivity to sales, not a guarantee about future earnings.
Three assumptions to investigate in an actual filing
- Which costs truly vary? Separate disclosed facts from estimates. Do not automatically label all cost of sales variable or all overhead fixed. Some expenses have both components.
- Does capacity change the cost base? An extra facility, shift or contract may add costs in steps. The unchanged-$30 assumption only applies within our stated range.
- Did price or product mix change? A sales change from discounts or a different product mix need not preserve the 60% ratio. Recalculate the model rather than reusing the multiplier without checking.
Operating profit is not net income or cash flow. Interest, tax, non-operating items, working capital and capital spending require their own review. A sensitivity table alone cannot establish an investment's fair value.
Try it before looking at the answer
Keep the same assumptions but change revenue to 95. What happens to operating profit? Variable costs become 57, leaving 95 − 57 − 30 = 8. Sales are down 5%; operating profit is down 20%. Now change fixed costs to 32 as well: profit becomes 6. Changing an assumption changes the answer.
A reusable research note
- Company, filing link, period and units:
- Revenue and reason for the change:
- Variable-cost estimate and evidence:
- Fixed-cost estimate and relevant capacity range:
- Base, lower-sales and higher-sales results:
- What the model leaves out or cannot verify:
Save the illustration and follow our research channel for practical stock-research cases. You can use this worksheet without installing or purchasing anything. It is an independent educational worksheet, not a claim that SignalSage automatically separates a company's fixed and variable costs.
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Concept reference: OpenStax, operating leverage. The reference supports the concept; the scenarios and worksheet above are our own fictional illustrations, not actual company results.
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