There seems to be a flaw in the solution of question 2.
Reason: COGS are not considered
Currently, calculation says:
Revenue 1bn - 920m fixed costs = 80m profit = 8% margin
But If we know that the gross margin is 50%, only 50% of the revenue of 1bn is available to cover the fixed costs (gross profit), the other 50% (500m) are the COGS.
Therefore, the calculation would be:
Gross profit 500m - 920m fixed costs = -420m which would result in -42%
Please let me know your thoughts.
Hi there,
To be honest, there's a lot going on in your Q&A + the case which, admittedly, would take a fair amount of time to process (would do this for a candidate, but not a free Q&A tbh).
Here is one thing I do see though: There's a lot of messiness around gross margin, profit, fixed costs, cogs, etc.
Just double check your understanding of these accounting terms and what goes into what (as well as in relation to the case). Additionally, remember that this case is 3 stars so there are probably some issues :)
E.g.
(edited)
Hi there!
Sharing with you an additional resource in case it helps - a collection of the most common terms that show up in interview (with definitions and equations):
Best,
Cristian
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Thank you for your question. We have reviewed and adjusted the case. We hope it is more clear now, and let us know if you have further feedback. Your PrepLounge team
I had exactly the same issue, which Ian's answer does not address.
Total revenue = profit + fixed costs + variable costs
The solution suggests 1B revenue = 80M profit + 920M fixed costs, apparently ignoring the variable costs, which seems wrong given the high COGS.
If Anonymous and I are mistaken, I would appreciate a clearer explanation from anyone in the community. If it is in fact an error, then a strange move from PrepLounge to solicit subscriptions in order for them to point out mistakes in their content.
(edited)
It was me who wrote the first post, I don't know why my name is not displayed. Will contact you directly for clarification. Overall, I don't think Preplounge is to blame here, as there is no mandatory quality control here. However, I find it more remarkable that you also notice the flaw, while the other answers aim at solutions without really understanding the issue
Thanks Jens!
(edited)
I did not say, that COGS do only include variable costs. I just said, that COGS are not considered in that case and in consequence the solution is not correct.