Hi all!
I do not understand why we take 0.7c as the cost per envelope when calculating the new profits (section III.).
My reasoning:
0.7c is the total cost we calculated per envelope when company was producing 50m units.
However those costs include fixed and variable costs (COGS).
Hence, when calculating the new profits we should assume gross margin remains the same at 36% and that fixed costs remain the same at 17m.
Profits would then be 75*0.9 - 75*36% - 17m ~ 23.5m.
Any comment?
B.
Case by
Regarding gross margin your point is correct and my reasoning wrong but the result is the same.
Reasoning should not be 75m$ revenues * 36%, but 75m units * variable cost per unit so 75*0.36 however since the initial price was 1 dollar per unit the result is the same 27m.
As per the fact that the unit costs are already optimized, to me the way is it written is not perfectly clear. It sorts of imply that at current situation 50m the costs cannot go down (to avoid interviewee going in that direction) but in no way it says that fixed costs should be considered variable. It would make no sense imo that R&D, SG&A and Labor cost would grow proportionally with revenues, just like variable costs would do.
Best,