How do we put Cat Lavatories sales and costs in relation?

Question

Hello everyone!

I know it has been said in the case that cat lavatories are sold basically at production cost, but somehow this does not seem right to me.

Sales of cat lavatories account for 70M€ in Y3 and gross margin is 0%, leaving no doubts that total costs are 70M€.

The production and labour costs are 5M€ though, which leaves 65M€ to be allocated on other types of costs... am I doing a thinking error here?

If not, would it not be worthy to analyse what these other costs are before shutting the production line down (which would actually generate additional costs)?

Thank you!

Answer 1

Hello Eleonora!

Though I see what you mean, I would honestly not read too much into it. When they tell you something as part of the prompt, in this case that sales are 70 million and gross margin is 0%, indeed the pure 70 millions are cost -regardless of how much is direct vs. indirect and how easy it is to reconciliate-.

Hence, do not overthink it and just stay with your 1st reading, which was correct, and all you need in this case.

Hope it helps!

Cheers,

Clara

Answer 2

Hi Eleonora,

I totally understand your point and appreciate your critical thinking (keep it up!)

That said, don't let this type of thinking distract you from the case. You can make a comment/note that this seems quite high, but make sure to follow the course of the case without deviating too much!

All that said, with mass manufacturing, labor is indeed a low cost. I don't see it as unreasonable that 5-10% of costs are labor. There are a lot of expenses in the form of raw materials, equipment (machines), rent, etc.

Answer 3

Hi Eleonora,

I completely undersand your point and I'd definetely bring it up on the interview if it was a real case. If you notice something like that and can show your reasoning about this, It is worth mentioning.

Hope it helps,

Cheers,

GB