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Fixed costs

Wall Inc.
Neue Antwort am 5. Feb. 2021
3 Antworten
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JIE fragte am 4. Feb. 2021

May I please ask how can we assume the fix cost is $300K? fixed cost per unit is $3, if we change the volume, the fixed costs= $3 * unit sold, is it correct?

thank you

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Ian
Experte
Content Creator
antwortete am 4. Feb. 2021
#1 BCG coach | MBB | Tier 2 | Digital, Tech, Platinion | 100% personal success rate (8/8) | 95% candidate success rate

Hi JIE,

This case is a bit misleading. It really should be contribution margin. That is, at x rate of production, what is the marginal FC per unit sold.

Of course, this changes as you change # of units.

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Luca
Experte
Content Creator
antwortete am 4. Feb. 2021
BCG |NASA | SDA Bocconi & Cattolica partner | GMAT expert 780/800 score | 200+ students coached

Hello JIE,

You are right, the text of the case is quite confusing on that.
I think that the "fixed cost/Unit=3$" is just the incidence of the fixed costs per unit sold (total fixed costs/total volume). By definition fixed costs can not be strictly correlated with volumes. For that reason, once that you calculate the fixed costs as 3$/unit*100,000units=300k$, you can assume that they do not vary for the rest of the case.

Is that clear?

Best,
Luca

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JIE am 4. Feb. 2021

thank you for your quick response, Luca. in this case, I understand. However regarding the market share changes, I'd like to under stand why we make the profit equals to 100,000? I calculated the profit margin would be 1/3.

JIE am 4. Feb. 2021

thank you

Luca am 4. Feb. 2021

Because in this case the market share is calculated considering the volumes of units sold

Clara
Experte
Content Creator
antwortete am 5. Feb. 2021
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

Agree, misleading wording.

Important concepts here:

  • FIXED COSTS. they don´t vary with the output
  • FIXED COST/UNIT: this refers to the 3 USD in the case. These are the total fixed costs/total units, hence, the allocation of total fixed cost per each unit. The more you produce, the smaller this number will be

Hope it helps!

Cheers,

Clara

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Ian

Content Creator
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