contribution margin math question

Question

One of the areas LG knows it needs to invest is it's internet capabilities. The client team has recently done a deep dive on this and found that to catch up with competitors Sony and Samsung, they'll have to invest about $350M into a team, partnerships and initial marketing to make an effective splash. They believe that this will allow them to increase unit price on new TVs by $200 per unit with continued variable costs of $150 per fully internet capable units. Assuming LG's investment predictions are accurate, how many TVs with the bumped up price point will they need to sell to breakeven on their investment? (Answer: 7M units)

When we calculate contribution margin..is it price per unit - variable cost per unit? Here we don't know the original price, only the increment in price, so I am wondering how they could use the contribution margin formula

Answer 1

You are having trouble because this prompt is confusing.

You don't need to know the original price (in the initial situation you were already capturing that contribution margin). What you need is the additional contribution margin, i.e., additional price and the additional variable costs.

This is were the prompt gets confusing because they don't mention additional VC, but instead they refer to “continued” VC.

But the truth is that the only way to get to 7M is assuming that the $150 variable costs are indeed additional.

Breakeven: Investment = Margin * Volume
$350M = ($200-$150) * V
V = 350M / (200-150) = 7M

I don't agree with this solution.

Answer 2

This is only solvable if the “continued variable costs" is interpreted as the “variable costs required to make the standard TVs into internet capable units”.

As a result the $150 could then be assumed as the incremental variable cost per unit and post that Pedro's answer applies.

Answer 3

Hi there,

Just to add to Pedro's answer here, I highly recommend you take time to truly digest all of the terminology out there.

Make sure you're clear on the differences between margin, markup, contribution margin, etc. It's really easy to confuse these in a prompt like the one above!

Answer 4

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