BCG Interactive Case LCC Profitability

Question

Hello, I am struggling to figure out the answer to this question from BCG Online Case library:

By what percentage does the client need to increase the average ticket price to maintain its profits?

You are given the following information:

Sales: $1,500 millions
Profit margin: 20%
Expected fuel price increase: 50%
Current fuel costs are half as high as non fuel costs

We are looking the percentage increase of the revenue that will keep our 20% margin.

Old cost= 800 (Non fuel cost) +400 (Fuel cost) = 1200

New cost=800 + 600 = 1400

Therefore the new equation should be:

(1500+x)-1400=0.2(1500+X)

I would need some help figure out what is wrong in my equation.

The answer is supposed to be 13.3%

Thanks a lot for your help

Answer 1

Your equation is correct but for a different objective - you are trying to maintain the profit margin while the case is asking to maintain profits, so the profit margin might change.

You current profits are 300 (120 costs and 150 sales). WIth new costs of 140, your sales need to be 170 to maitain 300 in profits. 170/150=13% increase.

From your equation, the x=25, and price increase has to be 16% to maintain the profit margin. However, that's a differnt objective from the one stated in the case.