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Clara

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3

How do we put Cat Lavatories sales and costs in relation?

Hello everyone!

I know it has been said in the case that cat lavatories are sold basically at production cost, but somehow this does not seem right to me.

Sales of cat lavatories account for 70M€ in Y3 and gross margin is 0%, leaving no doubts that total costs are 70M€.

The production and labour costs are 5M€ though, which leaves 65M€ to be allocated on other types of costs... am I doing a thinking error here?

If not, would it not be worthy to analyse what these other costs are before shutting the production line down (which would actually generate additional costs)?

Thank you!

Hello everyone!

I know it has been said in the case that cat lavatories are sold basically at production cost, but somehow this does not seem right to me.

Sales of cat lavatories account for 70M€ in Y3 and gross margin is 0%, leaving no doubts that total costs are 70M€.

The production and labour costs are 5M€ though, which leaves 65M€ to be allocated on other types of costs... am I doing a thinking error here?

If not, would it not be worthy to analyse what these other costs are before shutting the production line down (which would actually generate additional costs)?

Thank you!

(edited)

3 answers

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Book a coaching with Clara

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Hello Eleonora!

Though I see what you mean, I would honestly not read too much into it. When they tell you something as part of the prompt, in this case that sales are 70 million and gross margin is 0%, indeed the pure 70 millions are cost -regardless of how much is direct vs. indirect and how easy it is to reconciliate-.

Hence, do not overthink it and just stay with your 1st reading, which was correct, and all you need in this case.

Hope it helps!

Cheers,

Clara

Hello Eleonora!

Though I see what you mean, I would honestly not read too much into it. When they tell you something as part of the prompt, in this case that sales are 70 million and gross margin is 0%, indeed the pure 70 millions are cost -regardless of how much is direct vs. indirect and how easy it is to reconciliate-.

Hence, do not overthink it and just stay with your 1st reading, which was correct, and all you need in this case.

Hope it helps!

Cheers,

Clara

Thank you for your answer, Clara. I must say I am still skeptical about the conclusions, because 0% profit is anyway not a loss, and you might want to do further analysis and consider other factors (e.g.: Brand Awareness) before suggesting to shut the production down. But many thanks for your advice, it definitely helps! — Eleonora on Jan 25, 2021

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Hi Eleonora,

I completely undersand your point and I'd definetely bring it up on the interview if it was a real case. If you notice something like that and can show your reasoning about this, It is worth mentioning.

Hope it helps,

Cheers,

GB

Hi Eleonora,

I completely undersand your point and I'd definetely bring it up on the interview if it was a real case. If you notice something like that and can show your reasoning about this, It is worth mentioning.

Hope it helps,

Cheers,

GB

Thank you Gaurav for your feedback! — Eleonora on Jan 25, 2021

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Hi Eleonora,

I totally understand your point and appreciate your critical thinking (keep it up!)

That said, don't let this type of thinking distract you from the case. You can make a comment/note that this seems quite high, but make sure to follow the course of the case without deviating too much!

All that said, with mass manufacturing, labor is indeed a low cost. I don't see it as unreasonable that 5-10% of costs are labor. There are a lot of expenses in the form of raw materials, equipment (machines), rent, etc.

Hi Eleonora,

I totally understand your point and appreciate your critical thinking (keep it up!)

That said, don't let this type of thinking distract you from the case. You can make a comment/note that this seems quite high, but make sure to follow the course of the case without deviating too much!

All that said, with mass manufacturing, labor is indeed a low cost. I don't see it as unreasonable that 5-10% of costs are labor. There are a lot of expenses in the form of raw materials, equipment (machines), rent, etc.

Hi Ian, thank you for your feedback! I see your point and will bear in mind that 10% might be a good share for labour costs. Nevertheless in the case the 5M€ costs are referred as both labour and operating expenses, and that seemed to be too low to be left over from the analysis. I will anyhow take your advice and leave this consideration in the form of a comment. Thank you! — Eleonora on Jan 25, 2021