Hi all,
which one do you think is the answer here? seems a bit tricky
Bain & Company
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Hi coach Christian. I don’t think your answer is correct - 25% profit margin factors in price, volume and and cost, not just cost. The cost structures are clearly not the same between the two companies. Can you elaborate how you got to your conclusion?
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Hi Eva,
This seems to be a bit of a trap with an "obvious" answer, that's actually wrong.
Just looking at the % profit margin in the graph (25% in both cases) is misleading , as profit margin is determined by both cost and price point of the product, while the prompt asks for cost structure only. Hence, you will need to zoom into the cost part to answer the question at hand.
To compare cost, you should look at cost per pound to make it comparable, as described by Jimmy.
- Divide total revenue by price to get the volume in pounds
- Extract total cost = 75% of revenue for both companies
- Divide total cost by volume
- Compare the results, which will result in the following
- Homegrown: $1.125/pound
- Chock: $1.5/pound
The so what: Homegrown is actually more cost competitive
- While at first sight, profitability seems to be comparable between the 2 firms, a deeper look will show that Homegrown has lower cost vs Chock.
- As Chock compensates for the more expensive cost base with a higher price point, at first sight the 2 companies look the same - but they are not
- To navigate through such smoke screens, ALWAYS make sure you read the prompt very carefully and isolate the problem
Hope this helps - do reach out via PM, if you have further questions.
Regards, Andi
Hi there,
If I'm reading this correctly, both companies have 25% profit, which would make the cost equal as a share of the revenues (75%). That would make (b) the correct answer.
It isn't tricky.
1. Divide revenue by price per pound, to find total number of pounds sold
2. Sum up cost by multiplying percentages with total revenue to find total cost (in dollars)
3. Total cost / Total pounds sold = Cost per pound
Homegrown = $1.125/pound
Chock = $1.5/pound
The former has a better cost structure
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