Case Question: Calculation of Break Even without Fixed Cost

BCG case study
New answer on Feb 29, 2024
3 Answers
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Anonymous A asked on Feb 14, 2024

Can someone please explain the reasoning behind the AgriCo Case from Casebook MBB Casebook 2021- Peter - K and specifically the calculation part.

Overall question is: The client is considering decreasing the prices for compact tractors by 5% to boost sales. How many tractors do they need to sell to break-even on this initiative?

We know that; 
• The client’s sales of tractors were $0.7B in 2020
• The share of compact tractors (under 40 PH) is 50%
•  The gross margin for compact tractors is 20% • The average price of a compact tractor is $30k

Can someone please elaborate on the calculation attached. 


 

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Ian
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replied on Feb 14, 2024
#1 BCG coach | MBB | Tier 2 | Digital, Tech, Platinion | 100% personal success rate (8/8) | 95% candidate success rate

Ah, PeterK casebook! It's a good one for math.

Step 1: Figure out what we LOSE by cutting our margin by 5%. (Those are the first 2 row).

Step 2: Figure out what additional volumes we need to make up for that loss, by setting Step 1's loss to equal volume times price times new margin

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Anonymous B updated the answer on Feb 14, 2024

I have the same question!
In my opinion there might be something wrong with the prompt as it refers to the price and not the margin.

 

Really looking forward to the answer!

(edited)

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Pedro
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replied on Feb 29, 2024
30% off in April 2024 | Bain | EY-Parthenon | Roland Berger | Market Sizing | DARDEN MBA

If your margin goes down by 25%… then your sales need to go up by the inverse of the margin decrease:

 1 / (1-25%) = 1.33x 

(or a 33% increase)

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Ian gave the best answer

Ian

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