Could you please clarify Q6 ?

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Edited on May 25, 2020
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Ana asked on May 25, 2020
Interviewer led cases / Mckinsey Style / Non Preplounge Cases

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Clara
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updated an answer on May 25, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello Ana!

For this problem in particular, but also in general when it comes to production cost, think of break even always from the equation:

Fixed cost / (Price per unit - Cost per unit)

  • Fixed costs: overall fixed costs for running the production (e.g., administration, plan, electricity, etc.) They need to be allocated to each product produced, in a fraction
  • Price per unit: price at which each unit is sold
  • Cost per unit: on top of the fixed ones, there are other costs, variable costs, associated to the price of producing each unit (e.g., raw material)

Hence, here we would need to divide $1B of fixed costs by $64, to obatin number of units of 15.6 million customers.

Hope it helps!

Cheers,

Clara

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Ian
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replied on May 25, 2020
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Hi Ana,

Breakeven point can be calculated by:

  • Fixed costs / (price per unit - cost per unit)

the equation is basically Fixed Costs = Profit * # of Units

In this case, price per unit minus cost per unit is actually already provided to us (profit of $64 per customer). So, all we need to do is divide fixed costs of $1B by $64, to get # of units of 15.62 million customers!

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Clara

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