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how to understand the last calculation

Oliver Wyman case: Full Electrons Ahead
New answer on Feb 05, 2020
1.3 k Views

Hi,

can someone help me and explain the last calculation? How do I get the number € 1,250 and € 1,000?

"80% of customers have to buy the warranty – average profit from the service is € 1,250 and the price decline to be compensated is € 1,000."

Thanks a lot!

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Hello,

I will try to make it clearer for you:

• Decrease in profit due to change of price = Old price - New price = 51.000 - 50.000 = 1.000
• Profit for each warranty sold = Revenues - cost of replacement = 2.350 - 1.100 = 1.250

Let's call with X the percentage of the total customer base (CB) that subscribe a wanrranty. In order to keep the same profit margin for each vehicle sold we can write:

• Decrease in profit = Profit from warranty --> 1.000 * CB = X * CB * 1250 --> X = 80 %

Does it make sense?
Feel free to text me for any further explanation needed.

Luca

it is a very clear answer. Thank you very much.