expert
Expert with best answer

Royce

100% Recommendation Rate

7 Meetings

2 Q&A Upvotes

USD 139 / Coaching

New Price

Semra Naz asked on Aug 13, 2019 - 2 answers

New Price = $2,300/(1-0,038) = $2390.85

Where do we get this number from and what does it signify? (Isn't the selling price $5,200)

Thank you

2 answers

  • Upvotes
  • Date ascending
  • Date descending
Best Answer
Royce
Expert
replied on Aug 13, 2019
Former BCG consultant with 3 years of experience in consulting; 50+ case interviews
Book a coaching with Royce

100% Recommendation Rate

7 Meetings

2 Q&A Upvotes

USD 139 / Coaching

Here, the assumption is that prices will fall as the companies want to gain market share by cost competition.

Based on this assumption, the answer assumes that gross margin of 3.8% stays the same (which is a significant assumption).

With a gross margin of 3.8%, this means that 96.2% of the price goes to cost. Costs, as calculated, are now $2300. Therefore, this leads us to the conculsion that the new price will be $2390.85. To calculate this, $2,300 / 96.2% (which is the equation shown in your question).

Of course, the earlier assumptions on gross margin staying the same are worth questioning.

Anonymous A replied on Aug 13, 2019

The new price is 42, the answer to all your questions.