Average price decrease calculation

Question

I really enjoyed this case but during the case and reviewing after, the average price decrease calculation doesn't make sense to me. The equation seems to calculate an average decrease for 2019 by subracting the percentage decrease 2018-2019 from 2019 revenue for each segment. However, shouldn't the 2019 figures already have accounted for the decrease in price in 2019? Meaning 80 in the equation below is already based on pricing of 96% (2019) against the benchmark of 2018 (100%). This really threw me and I can't quite figure out the logic of what is happening.

From the case:

"Average price decrease = (Powder revenues x Δ Powder price + Machine revenues x Δ Machines price + Capsules revenues x Δ Capsules price) / Total revenues = (80 x -4% + 100 x -7% + 120 x -2%) / 300 = -4%"

Answer 1

Hi there,

I might be wrong, but my understand is that 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

Answer 2

agree.. price has been squared here. Weighted average should be based on price * volume right? price * revenue = price * price*volume …doesn't make sense.