Lesson 7 of 8 · All lessons in this module
- The model's structure and the revenue forecast
- Operating costs, non-operating items and the pro forma income statement
- Forecasting the cash flow statement and balance sheetVideo lesson
- Behavioural biases in analyst forecasts
- Competitive factors: Porter's five forces, prices and costs
- Forecasting sales and costs under inflation and deflation
- Integrated cases: volume shocks, fixed and variable costs and assumption sets
- The forecast horizon and long-term projections
Lesson 7 of 8 · 17 min
Integrated cases: volume shocks, fixed and variable costs and assumption sets
A forecast question turns a story (a tax change, an input price move, a capex plan) into numbers in a fixed order: price and volume first, then which costs move with volume, then the margin; each assumption must be tied to the line it drives.
In short
- A tax passed to consumers raises the shelf price, not the producer's net price; volume then falls by the price elasticity times the price change.
- Split cost of sales into fixed and variable parts: fixed cost does not fall with volume, so operating profit falls by more than volume and the margin drops.
- An input's share of cost of sales = its share of variable cost × variable share of cost of sales; the margin effect of a price change is that share × the change × (cost of sales ÷ sales).
- Translate each assumption into the line it drives; interest on average gross debt links the income statement to the balance sheet, a held-flat amount does not.
- Growth capex is the new investment net of disposal proceeds; compare plans on that basis.
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