contribution margin math question

Math problem
New answer on Sep 01, 2023
4 Answers
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Anonymous A asked on Oct 08, 2021

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

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Pedro
Expert
replied on Oct 08, 2021
Bain | EY-Parthenon | Roland Berger | Market Sizing Expert | 30% discount in Feb & March

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.

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Agrim
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Content Creator
replied on Oct 22, 2021
BCG Dubai Project Leader | Learn to think like a Consultant | Free personalised prep plan | 6+ years in Consulting

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.

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Ian
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replied on Oct 09, 2021
#1 BCG coach | MBB | Tier 2 | Digital, Tech, Platinion | 100% personal success rate (8/8) | 95% candidate success rate

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!

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Clara
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replied on Sep 01, 2023
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

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Pedro gave the best answer

Pedro

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