Volume times price, and what the fixed costs do

Revenue is units times price

Tamarack’s revenue grew from $4,000 thousand in 2024 to $4,800 thousand in 2025 — up $800 thousand, or 20 %. That single number hides two very different stories, because revenue is units × price and either can move. In 2024 Tamarack sold 16,000 units at an average $250; in 2025, 20,000 units at an average $240. It sold more, and it sold cheaper.

The course decomposes the change with one fixed convention, stated in every prompt:

$$\text{Volume effect}=(\text{new units}-\text{old units})\times \text{old price}$$

$$\text{Price effect}=(\text{new price}-\text{old price})\times \text{new units}$$

For Tamarack (in thousands of dollars):

Volume effect  (20,000 − 16,000) × $250  =  +1,000
Price effect   ($240 − $250) × 20,000     =    −200
Total change                              =    +800  ✓

The two effects always sum to the actual change — that is the check. And the reading is the point: Tamarack’s growth came entirely from volume, and it gave back $200 thousand in price to get it. An analyst would ask whether the lower average price reflects discounting (a cost of growth), a mix shift toward cheaper products (a change in customer segments), or both.

The convention matters because the reverse one — Δunits × new price and Δprice × old units — also sums to $800 but splits it 960 / −160. Neither is wrong; a worksheet is graded on the one the prompt states.

Cost structure and operating leverage

Revenue rose 20 %, but EBIT rose from $500 to $720 thousand — 44 %. Nothing magical happened; the cost structure did it. Cost of goods sold is variable: it moves with units, and it rose 16 % on 20 % more units because Tamarack bought better. Operating expenses and depreciation are largely fixed: rent, salaried staff and store fit-outs do not grow with each extra tent sold. When fixed costs stay put and revenue grows, every incremental dollar above the fixed base falls through to profit. That amplification is operating leverage: the higher the share of fixed costs, the more EBIT swings for a given change in revenue — up in 2025, and just as hard down in a bad year.

Committed versus discretionary

Not all fixed costs are equally fixed. Committed fixed costs come from past decisions that cannot be undone quickly: store leases, depreciation on fit-outs, the head-office salaries needed to run twenty-two stores. Discretionary fixed costs are set each year by management and can be cut next quarter with no structural damage: advertising, staff training, the spring catalogue. When a downturn comes, discretionary costs are the ones that flex; committed costs are why operating leverage cuts both ways.