Average Price Decrease ?

Question

We are given the delta prices (easy to find from a previous chart) and then handed the following histogram showing revenues. The question is to calculate the average price decrease between 2018 and 2019. I am not understanding how the equation in the solution is established (does not make sense to me) :

This case is Espresso Whatelse on preplounge, can someone please reason the equation it looks like they are calculating the average decrease in price as the average decrease in price coming from product X contribution in total revenue + Product Y contribution in total revenue + Product Z contribution in total revenue (how would one know that the weight of a price decrease from 2018 to 2019 is the revnue from that product in 2019 / total revenues in 2019)

Answer 1

Hello there,

I'm the author of the case and I will be happy to answer all your questions about it. In this specific step, you want to calculate the impact of the price decrease on 2019 revenues. Looking for that outcome, you can weight the delta prices with the revenues.

Let's do an example, supposing that a shop sells 2 products:

Product A, that costs 200 in 2018 and 150 (-25%) in 2019
Product B, that costs 200 in 2018 and 200 (-0%) in 2019

Now, the fastest way to understand the impact of the product A price reduction, is looking at the revenues split. Let's do two different assumptions for the revenues split:

Product A is 100% of the 2019 revenues --> The impact is of 25%
Product A is 50% of the 2019 revenues --> The impact is of 50% * 25% = 12.5% of total revenues

Does it make sense?
Feel free to write me if you want to discuss this further

Luca

Answer 2

Hi there,

First, I think you mis-read (or were mis-told) the question. The question is "The candidate should now calculate the weighted average of the price reduction", implying the impact of price reduction on 2019, not the change from 2018 to 2019

Second, I highly recommend you ask this problem specifically on the case itself. There's an option to submit a question when you're on the case. This means future candidate will benefit from seeing the answer :)