Why is a growing café chain earning less?
Profitability diagnosis · 15 min · Fictional interview case
The situation
A café chain raises prices and sells slightly fewer drinks. Its board expected the new price to repair margins. Revenue rises, but profit is lower because ingredient and fixed costs also changed.
Diagnose the problem using numbers. Finish with one recommendation that management could test before changing prices across the chain again.
- Before
- 100,000 drinks; ₹100 price; ₹55 variable cost per drink; ₹25 lakh fixed cost
- After
- 95,000 drinks; ₹110 price; ₹65 variable cost per drink; ₹27 lakh fixed cost
- Scope
- One comparable period for each set of inputs
Your task
How did operating profit change, and what should management investigate first?
Reveal step-by-step solution
Compare contribution per drink
Before: ₹100 − ₹55 = ₹45. After: ₹110 − ₹65 = ₹45. Higher prices only offset higher unit costs.
Build profit in both periods
Before: 100,000 × ₹45 − ₹25 lakh = ₹20 lakh. After: 95,000 × ₹45 − ₹27 lakh = ₹15.75 lakh.
Explain the bridge
Lower volume costs ₹2.25 lakh of contribution. Higher fixed costs subtract another ₹2 lakh. Check which stores lost volume and what drove ingredient cost before testing a price or sourcing change.
Interviewer follow-up
If the chain can recover ₹3 per drink in sourcing savings at current volume, how much profit returns?
Compare your answer
95,000 × ₹3 = ₹2.85 lakh, taking modeled operating profit to ₹18.60 lakh. Check whether the sourcing change affects product quality or demand.