Calculating Revenue After a 10% Price Increase and a 5% Volume Decline
Calculate the interaction effect missed by simple addition when price and volume change together. Learn two ways to allocate the revenue change and the product-mix trap in average selling prices.
Revenue is price multiplied by sales volume, so changes in the two variables combine multiplicatively. Simply adding the price and volume percentage changes omits their interaction effect. State the decomposition order when allocating their individual contributions.
Multiply the two change factors to get the exact growth rate
A 10% price increase gives a price factor of 1.10, and a 5% volume decline gives a volume factor of 0.95. The revenue factor is 1.045, so revenue growth is 4.5%. This is 0.5 percentage points below the 5% obtained by simply subtracting 5% from 10%. The difference arises because the higher price cannot be applied to the units no longer sold. Align price and volume for the same period and product. Mixing contract values or shipment volumes with accounting revenue can change the meaning even when the formula is correct.
Choose an order for allocating contributions
If you apply the price effect first to prior-year volume, multiply the price change by prior-year volume. Then calculate the volume effect by multiplying the volume change by this year’s price. If you change volume first, calculate its effect at last year’s price, then the price effect at this year’s volume. Both methods give the same total but different individual contributions. A three-part approach showing the interaction separately is also possible. When comparing reports, check the reference prices and volumes before assuming different price contributions indicate an error.
Distinguish changes in average selling price from actual price increases
Selling more high-priced products can lift the average selling price even when each product’s individual price is unchanged. In that case, the average-price effect includes product mix. If product-level prices are available, separate like-for-like price changes from sales-mix changes. Otherwise, label the combined result a price/mix effect. It also matters whether the unit price is based on net revenue after discounts, returns, and rebates. Check the IFRS 15 basis for contract consideration and revenue recognition, and reconcile higher sales volume with actual delivery or satisfaction of performance obligations.
Worked example
Hypothetical example: Last year, selling 10,000 units at KRW 100,000 generated revenue of KRW 1 billion. This year, selling 9,500 units at KRW 110,000 generates KRW 1.045 billion, an increase of KRW 45 million. Changing price first gives a price effect of KRW 100 million and a volume effect of -KRW 55 million. Changing volume first gives a volume effect of -KRW 50 million and a price effect of KRW 95 million. A decomposition showing prior-year-based effects separately adds a price effect of KRW 100 million, a volume effect of -KRW 50 million, and an interaction effect of -KRW 5 million to reach the same increase.
What to check
- Align prices and volumes for the same products and period.
- Check whether adding the percentage changes omits the interaction effect.
- State the decomposition order and reference prices.
- Check whether higher average selling prices include a product-mix change.
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.