calculating combined profit margin

Question

if company A has 12% market share by rev and B has 8% market share by rev how do I calculate their combined profit margin? additional info is A has 4% profit margin before economies of scale and B has 3% profit margin before economies of scale. due to economies of scale the addition profit margin for A is 1.2% and for B is 0.8%. its assumed that by adding 0.1% to profit margin for every 1% market share

Answer 1

Hi there,

I know exactly where this is from :) (BCG Casey Chatbot practice test)

You need to do a weighted average.

When company A and B merge, they will have 20% market share (think, 20 dollars).

That means Company A has 60% of the revenue of the combined company and Company B has 40%)…12/20 and 8/20.

To get the weighted average from this you take Company A's weight, so 4 (profit margin) times 60%, which equals 2.4.

You then add that to Company B's weight, so 3 times 40%, which equals 1.2

You add these two to get 3.6 et voila!

Answer 2

It can be either one, you can define Market Share in term of units sold or in terms of revenue. I would say it depend... (read entire answer)

It can be either one, you can define Market Share in term of units sold or in terms of revenue. I would say it depends on how you previously defined it during the case and the p... (read entire answer)