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Calculate gross margin using revenue breakdown

business case case question
New answer on Nov 13, 2023
3 Answers
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Anonymous A asked on Mar 22, 2019

Hello! I'm doing a sample case and I'd like to know how can I find what year had the highest gross margin from a chart.

I know the gross margin would be the revenue minus the cost but I know there would be a more simple way since I do not have the cost in this chart but have the revenue breakdown year by year.

This looks like a simple question but I am not 100% sure how I can solve this.How to calculate gross margin using revenue breakdown

Thanks in advance for the help!

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Clara
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replied on Nov 13, 2023
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

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Eduardo replied on Mar 24, 2019

Y1: 0.47x0.5 + 0.16x0.7 + 0.02x0.08 + 0.04x0.4 + 0.2x0.3 + 0.12x0.15 = 0.4426

Y2: 0.42x0.5 + 0.16x0.7 + 0.08x0.08 + 0.04x0.4 + 0.2x0.3 + 0.09x0.15 = 0.4179

Y3: 0.37x0.5 + 0.16x0.7 + 0.16x0.08 + 0.04x0.4 + 0.19x0.3 + 0.08x0.15 = 0.394

Y4: 0.35x0.5 + 0.15x0.7 + 0.2x0.08 + 0.04x0.4 + 0.2x0.3 + 0.06x0.15 = 0.381

Y5: 0.32x0.5 + 0.13x0.7 + 0.26x0.08 + 0.04x0.4 + 0.2x0.3 + 0.04x0.15 = 0.3538

Y1 has the highest gross margin of all years

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Alexander replied on Mar 22, 2019

I think you can calculate the gross margin of each year as a weighted average of the gross margin of each of the segments, with the contribution of that segment to the total revenue as the weighing factor. So for each of the years, the overall gross margin would be contribution (bus) * gross margin (bus) + contribution (air tickets) * gross margin (air tickets) and so on, divided by the number of contributions.

To speed things up, you can use the fact that you won't need absolute value to sort them. You can therefore skip the division step, as the number of contributions is the same for each year (6) and that factor effectively cancels out. You can also remove some contributions that are sufficiently small or that are similar and therefore should cancel out - for example, air tickets contribute approximately 20% to the revenue in each of the years, and you will therefore arrive at the same order if you neglect this contribution.

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Vishal on Mar 22, 2019

Total margin for all years: Y1: 111.5, Y2: 125.37, Y3: 138.58, Y4: 153.2, Y5: 151.86

(edited)

Eduardo on Mar 22, 2019

Am I using this method correctly? Y1: Domestic: (255*47%)*50% = 59.925 Long Haul: (255*16%)*70% = 28.56 Promo: (255*2%)*8% = 0.408 Cruises: (255*4%)*40% = 4.08 Air Tickets: (255*20%)*30% = 15.3 Bus: (255*12%)*15% = 4.59 Y1 = 112.863 Y2 = 64.68 + 34.496 + 1.9712 + 4.928 + 18.48 + 4.158 = 128.7132. However, the correct answer is TravelCo reached highest gross margins (in %) in Y1. I don't think I should be using the Y1-Y5 gross margin in the calculation as I'm trying to figure which year has the highest margin but what should I use instead?

(edited)

Clara gave the best answer

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