Fictional case: Harbor Software's growth report
Audit a software division’s growth report before management uses it to plan spending.
Audit a division's claims about revenue growth, customer mix, and margin using the correct units and denominators.
Overview
You lead the operations-software division of established company Harbor Software. Its sales manager has drafted a growth report for the general manager's planning meeting. You must either approve it as written or return a corrected version before noon.
The general manager will use the report to consider staffing and marketing spending. Today you are approving only the report.
Harbor Software, its policies, and all figures are fictional teaching assumptions.
Recall Lesson 019: What should a decision memo preserve when the evidence challenges its recommendation?
The division and its customers
Harbor sells scheduling software to small service businesses. Basic provides standard scheduling; Pro includes more setup assistance and support. Each customer account buys exactly one plan for a full month.
The table covers two consecutive, equal-length reporting months. Counts include every account served for the full month. There are no partial-month charges, discounts, refunds, taxes, acquisitions, or other revenue. Prices and cost definitions stay unchanged.
| Plan | Revenue per account per month | Cost of service per account per month | Month A accounts | Month B accounts |
|---|---|---|---|---|
| Basic | $100 | $40 | 80 | 60 |
| Pro | $200 | $120 | 20 | 60 |
For this case, cost of service includes all costs classified as delivering the subscription, including hosting, setup assistance, and support. Treat the supplied amounts as complete and accurate for calculating gross profit. Other expenses, such as sales and administration, and cash-collection dates have not been supplied.
Finance has already checked Month A: revenue was $12,000 and gross profit was $6,400. You can use these starting totals.
Counts show each month’s customer mix, but not who upgraded, joined, or left. No renewal commitments or future sales data accompany the report.
The draft report
The sales manager proposes these statements:
- “Monthly revenue grew 50% from Month A to Month B.”
- “That means our prices rose 50%.”
- “Pro now represents half our customers, so it supplies half our revenue. Averaging Basic's 60% gross margin and Pro's 40% gives a division gross margin of 50%.”
- “Two more monthly increases of 50% will double Month B revenue to $36,000.”
The manager recommends emphasizing Pro because its higher price “must mean a more profitable division.” You need to separate valid calculations, incorrect interpretations, and assumptions about future results.
Exercise
Allow 10–12 minutes. Use these calculation aids:
Revenue = account count × revenue per account. Gross profit = revenue − cost of service. Gross margin = gross profit ÷ revenue × 100.
Basic gross profit per account is $100 − $40 = $60; Pro's is $200 − $120 = $80. Average revenue per account uses total revenue divided by total accounts.
- Calculate Month B revenue and revenue growth. Compare account growth with growth in average revenue per account. Which changes explain the sales increase?
- Calculate Pro's Month B share of accounts and revenue. Calculate Month B gross profit and gross margin, then compare them with Month A. Explain why the simple average of plan margins fails.
- Check the two-month projection using compounding. State whether either projected amount is established by the historical figures.
- Choose whether to approve or correct the report. Write a three-sentence note with the main corrections, one limitation, and a named next action.
Use this note structure: “Return/approve because ___. Corrected figures are ___. Before promoting Pro, ___ will check ___.”
Try the audit before reading the debrief.
Answer
Revenue and customer mix
Month B revenue is (60 × $100) + (60 × $200) = $18,000. Revenue growth is ($18,000 − $12,000) ÷ $12,000 × 100 = 50%. The first claim is correct for the specified monthly comparison.
Accounts increased from 80 + 20 = 100 to 60 + 60 = 120. Account growth is 20 ÷ 100 × 100 = 20%.
Average revenue per account rose from $12,000 ÷ 100 = $120 to $18,000 ÷ 120 = $150. That increase is $30 ÷ $120 × 100 = 25%.
Neither plan's price changed. The higher average comes from a larger share of accounts buying Pro, the more expensive plan. More accounts and a richer sales mix together explain revenue growth. Their factors reconcile: 1.20 × 1.25 = 1.50. Adding 20% and 25% would miss the combined effect.
The totals could include new Pro customers and departing Basic customers. Request account-level movements before attributing the change to upgrades.
Margin and profit dollars
Pro represents 60 ÷ 120 × 100 = 50% of Month B accounts. It supplies $12,000 ÷ $18,000 × 100 ≈ 66.7% of revenue because each Pro account pays twice as much.
Month B cost of service is (60 × $40) + (60 × $120) = $9,600. Gross profit is $18,000 − $9,600 = $8,400.
| Division result | Month A | Month B |
|---|---|---|
| Revenue | $12,000 | $18,000 |
| Gross profit | $6,400 | $8,400 |
| Gross margin | 53.3% | 46.7% |
Month A gross margin is $6,400 ÷ $12,000 × 100 ≈ 53.3%. Month B is $8,400 ÷ $18,000 × 100 ≈ 46.7%. Using unrounded values, the decline is about 6.7 percentage points. Gross-profit dollars nevertheless increased by $2,000, or $2,000 ÷ $6,400 × 100 = 31.25%.
Business Victoria's margin formula uses sales revenue as the denominator. Source: Business Victoria. Accordingly, combine plan margins using revenue shares. Basic supplies one-third of Month B revenue and Pro two-thirds: (1/3 × 60%) + (2/3 × 40%) ≈ 46.7%.
The simple 50% average gives the plans equal weight even though their revenue differs. Pro earns more gross-profit dollars per account, $80 versus $60, but has a lower margin percentage. Its larger share pulls the overall percentage downward. Neither measure establishes total division profit without the remaining expenses.
The projection and decision
Two further 50% increases would produce $18,000 × 1.50 = $27,000, then $27,000 × 1.50 = $40,500. That is 125% above Month B, rather than double. The draft's $36,000 adds two increases based on the same original $18,000.
The $40,500 calculation is correct only under the assumed growth path. One observed monthly increase does not establish that it will repeat.
Return the report for correction. A suitable note is: “Return the report: revenue grew 50%, while unchanged plan prices and a shift toward Pro produced 25% higher average revenue per account. Gross profit rose to $8,400, but gross margin fell to 46.7%; two further 50% increases would yield $40,500, which remains an unverified scenario. Before deciding how much to promote Pro, the sales manager and finance lead will check account movements, acquisition spending, renewal evidence, and support capacity.”
Recall answer: Preserve the strongest relevant objection and evidence that could change the recommendation. Here, higher revenue and gross-profit dollars belong alongside the lower margin and missing evidence about future demand.
Applying this case
For each claim, identify its period, unit, denominator, and status as an observation or assumption. Keep your corrected note with the calculation sheet. An owner reviewing a business for purchase would need the same distinctions before relying on its growth report.
Sources
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