632598256894

Scenario 2 might be a volume increase driven by more aggressive marketing and sales expenditures
rather than a price decrease. Sales would then be $1,212 and the last two columns show this result by
solving for the maximum spend in the selling, general, and administrative discretionary fixed expense
to drive a 10% volume increase, keeping prices constant. The $325 figure in the box shows that
Company X could increase its budget in this area by 29% [($324.8 - $252.0)/$252.0] and still maintain
its operating profit of $55.5.
These scenarios are rather simplistic but do demonstrate the power of developing this type of
information on competitors. In a relatively short set of analyses, given the identification of the cost
structure and the contribution format, it becomes clear that in this situation, scenario 2 is the much
more probable one. Generalizing this, one can easily run multiple scenarios in a short period of time.
Unfortunately, companies take great pains to make it difficult for this type of cost structure analysis to
be done on their publicly available financial statements. The next section of this chapter discusses the
pitfalls that can commonly occur when trying to decipher this information from Security and
Exchange Commission (SEC) filings.