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Ian

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Percentage of customers needed to buy the warranty in order to keep WyCar’s profit margin from model “300” stable

Can anyone guide me through this calculation please? I don't understand how the % that price reduction (€1000) represents of warranty profits (€1250) is directly related to the % of costumers needed to keep profits stable (80%).

Thank you in advance!

Can anyone guide me through this calculation please? I don't understand how the % that price reduction (€1000) represents of warranty profits (€1250) is directly related to the % of costumers needed to keep profits stable (80%).

Thank you in advance!

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Hi there,

Fair question! So, because we are losing revenue from price reduction, we need to make up for this by gaining revenue from warranty sales.

This is a classic breakeven!

So, first, create the full formula, and then pulg-in what's missing.

  1. Profit from warranty* % quantity sold = Profit loss from car
  2. (Revenue from warranty - expected cost from warranty) * quantity sold = Profit loss from car
  3. (2,350 - 1,100) * quantity sold = $1,000
  4. 1,250 * quantity sold = $1,000
  5. Quantity sold = 1,000/1,250 = 80%

Hi there,

Fair question! So, because we are losing revenue from price reduction, we need to make up for this by gaining revenue from warranty sales.

This is a classic breakeven!

So, first, create the full formula, and then pulg-in what's missing.

  1. Profit from warranty* % quantity sold = Profit loss from car
  2. (Revenue from warranty - expected cost from warranty) * quantity sold = Profit loss from car
  3. (2,350 - 1,100) * quantity sold = $1,000
  4. 1,250 * quantity sold = $1,000
  5. Quantity sold = 1,000/1,250 = 80%

Thank you very much for your answer Ian! Now it's very clear. I guess then it is just the quantity of warrants represented as a percentage (multiplied by 100). I'm used to seeing x as a percentage of y, not standing alone. So in this case I would see this % as the loss from car being 80% of profits from the warranty, so we have to compensate with 80% more sales. Is it common for quantity sold being asked as a percentage? — Anonymous A on Aug 20, 2020