Hey everyone,
Just wanted to share an observation on the final question for the Model 300 math. The question asks how to keep the "profit margin" stable, and the answer gives 80% . You can check earlier threads regarding the 80% solution (for example, here).
If we stay true to definitions, the question that should be asked to get to 80% answer is:
Which percentage of customers has to buy the warranty to keep the total dollar contribution from the Model 300 stable?
If you are trying to write out a strict percentage margin formula here, you'll drive yourself crazy because we don't have the base manufacturing cost of the car. If you map it out rigorously, you'll see why the math breaks:
- For stable profit Margin: Original Margin = New Margin
You will need to solve for X:
- (51,000 - C) / 51,000 =(50,000 - C + 1,250X) / (50,000 + 2,350X)
(Where C is the Manufacturing Cost of the car, and X is the warranty take-rate percentage)
As you can notice, the new variables change the underlying averages:
- Average Revenue per car = 50,000 + 2,350X
- Average Cost per car = C + 1,100X
- Average Profit per car = 50,000 - C + 1,250X
The 80% solution only works if you balance flat profit dollars per car, not percentage margins.
