Theory of the Firm - Unilever expects flat profit after being hit by rising costs

Here is a good example of how higher input costs are cutting the profit margins of one of the world's largest consumer goods firms.

Unilever owns some of the world's most well-known brands and has manufacturing plants around the world.

But no business is immune to a surge in input costs including higher transport bills, rising commodity prices such as crude oil, palm and soya bean oil and increased wage bills due to labour shortages in several countries.

The price of packaging has also risen due to fast-growing demand for cardboard and other materials.

A crucial decision for any business is whether to absorb higher variable costs by accepting lower profit margins. Or to pass on to consumers through higher prices.

Unilever has strong market power in many industries. But many of them are oligopolistic, so Unilever will need to consider the likely reactions of rival firms to their pricing decisions.

Unilever makes huge turnover and profits - for 2021 as a whole, their latest forecast is a turnover of just under Euro 26 billion with net profits of Euro 3.4 billion.

If variable costs rise, can you draw a cost and revenue diagram to show the likely effects? The revision video below provides some guidance.