Banana Eagle is experiencing rising sales along with increased market share. However, profits are falling while costs have actually improved, what may be the issue?
Explanation
Answer: e - Margins and product mix are the most likely out of the choices to be the issue. Economies of scale causes costs to fall, while the question states COGS are fixed. Margins consider both revenue from the sales and COGS. In this case, you can rule out COGS, so you know it is a margin problem.
Product mix also affects margins. For instance, a restaurant typically makes much higher margins on alcohol than food. Imagine if food sales increased, but alcohol sales decreased.
Key Take Away: This scenario describes a scenario you will likely see at some point. Banana Eagle’s gross sales have increased, but they are earning less of a profit on each sale. It happens when firms reduce margins to sell more goods.
