FP&A case: explain the revenue miss

The brief and your deliverables

The CFO wants a short explanation of revenue versus budget, a check on whether gross profit deteriorated by the same amount, and two questions for the sales team. Use thousands of units and dollars per unit, so calculated revenue is in $000. There are no returns, rebates, currency movements or accounting-policy changes in this exercise.

• Calculate budget and actual revenue by product and in total.
• Build a volume-then-price bridge for each product.
• Explain how a favorable change in product volume can coexist with a revenue miss.
• Calculate gross profit using variable unit costs of $12 for Standard and $24 for Premium in both periods. There are no other cost-of-sales items.

Choose a bridge convention

Use volume effect = (actual units - budget units) x budget price. Then use price effect = actual units x (actual price - budget price). This convention allocates the interaction between price and volume to the price effect. A different consistent convention can allocate that interaction differently while still reconciling to the same total variance.

For multiple products, show product-level effects before combining them. This exercise's volume effect includes the change in product mix; it does not separately decompose aggregate volume and mix.

Worked solution: the bridge closes

Revenue is $1,000 below budget, or 0.25%. Standard loses $20,000 from lower units at budget price and $9,000 from the lower realized price on 9,000 actual units. Premium gains $40,000 from volume and loses $12,000 from price. The favorable $20,000 combined volume effect is slightly more than offset by the $21,000 price effect.

Budget variable cost is $120,000 + $120,000 = $240,000; budget gross profit is $160,000, a 40.0% margin. Actual variable cost is $108,000 + $144,000 = $252,000; actual gross profit is $147,000, approximately 36.84% of revenue. Gross profit is down $13,000 even though revenue is down only $1,000.

At budget prices, the changed product volumes add $8,000 of gross profit: -1,000 x $8 Standard unit margin + 1,000 x $16 Premium unit margin. Price reductions then remove $21,000. The gross-profit bridge is $160,000 + $8,000 - $21,000 = $147,000.

Turn the calculation into a management note

• Ask sales for discount and customer-level detail. The bridge alone does not establish why price changed.
• Check whether unit costs are genuinely unchanged in the forecast; this case holds them constant only to isolate the exercise.
• Separate actual results from a proposed forecast. Do not mechanically annualize one quarter's variance.
• Request evidence that a price change affects demand before recommending a price increase.

An extension: hold units constant and restore prices

Assume next quarter repeats actual units, unit costs remain fixed, and both prices return to budget with no demand response. Calculate revenue and gross profit. Then write why management should not treat that scenario as a forecast.

Source notes

Sources support the underlying concepts. The worked cases, figures and examples are original teaching material with the assumptions stated in the resource.

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