Chapter 15 · Day 15 — Hotels and manufacturing
Manufacturing: capacity, margins and the cycle
Fixed costs make manufacturing profits swing more than sales. Capacity utilisation explains most of it.
17 of 30 · 11 min
Manufacturing is read with the general framework — margins, turnover, the cash conversion cycle from Day 10 — plus capacity.
Operating leverage, shown
| Scenario | Revenue | Fixed costs | Variable costs | Profit |
|---|---|---|---|---|
| Base | 1,00,000 | 30,000 | 60,000 | 10,000 |
| Revenue +10% | 1,10,000 | 30,000 | 66,000 | **14,000 (+40%)** |
| Revenue −10% | 90,000 | 30,000 | 54,000 | **6,000 (−40%)** |
A 10% move in revenue produced a 40% move in profit, in both directions. That is operating leverage: it is not a risk in itself, but it means profit is far more volatile than sales, and a forecast built on smooth revenue growth will be wrong about earnings.
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