Interviewer view · keep this screen to yourself
Harthmoor: operating profit fell by two thirds
You run the case. Read the prompt, answer questions from the notes below, and share data only when the candidate asks for it or gets stuck. Score at the end.
Case timer
00:00
1. Read the prompt aloud
Read it slowly, then pause. Let the candidate ask questions before they structure.
Harthmoor, a UK maker of kitchen appliances, shared its income statement for the last two years in GBP millions (see the table above). Explain the fall in operating profit and say where to look next.
The prompt refers to Exhibit 1. After reading it, say: "Open Exhibit 1 now."
Format note: Interviewer-led: the interviewer hands you the statement and asks what drove the fall, then where to look next.
2. Answers to clarifying questions
Give these answers only if the candidate asks. If they ask something not listed, give a sensible answer or say it does not matter here.
If asked: Did selling prices change this year?
Answer: No. List prices were flat, so the 2.5 percent revenue rise came from selling about 2.5 percent more units.
If asked: Did the product mix change, for example more of a cheaper model?
Answer: No, the mix was stable.
If asked: Is the goal to explain the drop, or also to fix it?
Answer: Explain it first, then say where to look next.
3. The hypothesis a strong candidate states
Listen for an early, testable guess like this one. It does not need to match word for word.
Revenue rose slightly and operating costs look flat, so my hypothesis is that the direct cost of making each unit has risen, for example from component prices or factory problems. I will test it with the gross margin and the cost per unit.
4. A model structure
Compare the candidate's structure with this one. A different split can be just as good if it is clean and fits the problem.
- Rank the lines by their effect on operating profit
- Revenue: up 5 (helps profit)
- Key: COGS: up 25 (hurts profit)
- Units sold
- Key: Cost per unit
- Operating costs and D&A: flat
Exhibit 1
The prompt uses this exhibit, so the candidate opens it right after you read the prompt ("Show exhibit 1" on their screen).
| Line | Last year (GBP m) | This year (GBP m) |
|---|---|---|
| Revenue | 200 | 205 |
| Cost of goods sold (COGS) | 120 | 145 |
| Gross profit | 80 | 60 |
| Operating costs (excluding D&A) | 40 | 40 |
| EBITDA | 40 | 20 |
| Depreciation and amortization (D&A) | 10 | 10 |
| Operating profit (EBIT) | 30 | 10 |
| Interest | 6 | 6 |
| Profit before tax | 24 | 4 |
| Tax (25 percent) | 6 | 1 |
| Net income | 18 | 3 |
So-what
Revenue rose by 5, and operating costs, D&A, and interest were flat. Cost of goods sold rose by 25, so the 20 fall in operating profit comes from the cost of making the product, partly offset by slightly higher revenue.
5. The working, step by step
Each step shows how a strong candidate works it out. Share a new fact from it only when the candidate asks or is stuck, and let them do the math: the result in the dark box is what they should reach.
Step 1: Size the drop
What a strong candidate does: Operating profit (EBIT) fell from GBP 30 million to GBP 10 million.
EBIT fall (GBP m): 30 - 10 = 20
Step 2: Build the profit bridge
What a strong candidate does: Revenue rose by 5 and COGS rose by 25; operating costs and D&A did not move. The bridge ties out to the 20 fall.
Change in EBIT (GBP m): (205 - 200) - (145 - 120) = -20
Step 3: Gross margin, last year
What a strong candidate does: Gross profit of 80 on revenue of 200.
Gross margin last year (%): 80 ÷ 200 × 100 = 40
Step 4: Gross margin, this year
What a strong candidate does: Gross profit of 60 on revenue of 205. The margin fell by about 11 points, which points straight at direct costs.
Gross margin this year (%): 60 ÷ 205 × 100 = 29.27
Step 5: Compare growth rates
What a strong candidate does: Revenue grew 2.5 percent, but COGS grew much faster.
COGS growth (%): (145 - 120) ÷ 120 × 100 = 20.83
Step 6: Cost per unit
What a strong candidate does: Prices were flat, so units rose about 2.5 percent (from the clarifying question). COGS per unit therefore rose by about 18 percent.
This year's cost per unit vs last year: (145 ÷ 120) ÷ 1.025 = 1.18
Step 7: Follow it to the bottom line
What a strong candidate does: The same 20 fall passes through interest (flat at 6) to profit before tax, which falls from 24 to 4. After 25 percent tax, net income falls from 18 to 3.
Net income this year (GBP m): (24 - 20) × (1 - 0.25) = 3
The recommendation to listen for
At the end, say: "The CEO walks in. What is your recommendation?"
I recommend that Harthmoor focus on the cost of making each unit, because it explains the whole GBP 20 million fall in operating profit, from 30 to 10. First, revenue rose by GBP 5 million while operating costs, D&A and interest did not change, so the fall sits in COGS, up GBP 25 million. Second, COGS rose about 21 percent while units rose only 2.5 percent, so cost per unit is up about 18 percent. Third, gross margin fell from 40 percent to about 29 percent. Next, split unit cost into materials, labor and factory overhead.
Risks a strong answer names: A one-time event, such as a factory breakdown, may explain the rise and would call for a different fix; If competitors did not face the same cost rise, a price increase would lose market share.
Next steps: Break unit cost into materials, labor, and factory overhead; Compare unit cost with the two largest competitors.
Strong versus weak
A strong answer
Built a profit bridge, led with the line that moved profit most, used gross margin and cost per unit to locate the problem, and named a focused next step.
A weak answer
Read all eleven lines aloud, said "costs went up," and never found the unit-cost problem.
Score the candidate
Score each criterion from 1 to 5. A 2 or a 4 sits between the descriptions.
Total
0 out of 25
Score all five criteria to see the band and the feedback template.