Introduction
The two causes of an increasing or decreasing sales number are the price and volume of goods sold by a company. The increase in sales might be explained by the fact that the retailer has raised the product’s price or sold more units at an older price. However, in some cases, companies manage to increase sales by combining both factors and selling a larger number of items at a higher price. The same principle applies to cases when firms are facing a decrease in sales. The drop in the sales number can be attributed to a reduced price on the items, a smaller volume of goods sold, or the combination of two factors. Therefore, it is crucial to analyze both the price and volume of goods when evaluating sales numbers.
Explaining Increase or Decrease in Gross Profit
Fluctuations in gross profit can be caused by factors that are closely connected to the definition of the concept. Gross profit is described as the difference between revenue from the sale of a product and the cost of making the product (Biery, 2013). Therefore, it is crucial to take into account the two reasons that might explain changes in gross profit: sales revenue and product cost.
Firstly, a higher or lower cost of goods sold might affect the gross profit’s increase or decrease. Changes in the cost of goods might be caused by the price of supplies used for producing the company’s products. The price of supplies can increase due to higher demand from the company’s competitors or the supplier’s decision to increase their revenue. The development of new technologies, revised distribution or transportation costs, or new standards can also significantly affect the cost of producing the product. In case when the product is sold at the same pace, but the cost of making the product has significantly reduced, the company will face an increase in gross profit. This can be illustrated by the smartphone industry where major players like Apple or Samsung report constant growth even though the cost of producing smartphones goes down, and the demand stays more or less unchanging.
Secondly, since gross profit depends on the total sale of a product, its increase or decrease can be caused by the change in net sales. The reasons for shifts in the sales number might be multiple. It can be a lower or higher demand on the product due to advertising, changes in the market share with rivals entering or leaving the competition, or fluctuations in the price and volume of goods sold. Examples of this sort are multiple and manifest themselves in many industries. Sales might increase due to seasonal phenomena (high demand on A/C and fans in areas with normally mild climate), major disruptions (COVID-19 demand for face masks and respirators), or viral popularity (fidget spinners). Similarly, sales can decrease due to the same reasons and many other factors such as inadequate marketing, lack of demand, fierce competition.
This brief overview gave a short explanation of the reasons for changes in gross profit but has not exceeded all of them in detail. It is vital to remember that both sales numbers and the cost of the product could cause a gross profit to increase or decrease. The key is to take both of the factors into account, analyze the numbers carefully, and act accordingly.
Reference
Biery, M. E. (2013). What are your financial statements telling you? Forbes. Web.