The profit volume relationship – an important lesson for any business

Tracey Taylor writes in the NY Times (Apr 7, 2010) about a US design and build company, mkdesigns. The company designs and builds prefabricated, environmentally friendly homes. The founder, Michelle Kaufmann, decided in 2006 to buy or build a factory as she could not find producers willing to form a strong business alliance to deliver quality product on time.  The reason for this? Simply, it was 2006 – the top of the construction boom in the US (and Europe). Kaufmann acquired one factory, then another, which increased the businesses cost base.  Higher sales volumes were needed to cover the increased costs and maintain profits. Then, the bust came in 2008, sales volume declined and the business had to close its two factories.  The basic lesson here is that a certain level of sales are needed to cover costs; increase costs without a corresponding increase in sales an your business is in trouble . Read the full article here –My Green Prefab Business, and How It Once Grew –

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About martinjquinn

I am an accounting academic, accountant and author based near Dublin, Ireland.

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