Since this is a candidate-led case, the candidate should drive the case from start to finish. The key to solving this case is realizing that the sales mix has changed and that different products have different product margins.
Now, we can analyze the cost side of the business.
Indirect costs have not increased. However, if the price of rawmaterial and the amount of raw material used in both products has not changed over time, why are costs increasing?
The interviewee should realize that although both products have the same price, flavored chewing gum requires an additional raw material - flavor. Since flavored chewing gum costs more to produce than flavorless chewing gum, the profit margin of both products must be different.
Both products are sold at the same price. However, flavored chewing gum costs more to produce because it requires an additional raw material. Thus, it has a lower profit margin compared to flavorless chewing gum.
As both products have the same price point and the flavored chewing gum needs the same raw material as the flavorless gum plus the flavor, this results in higher costs per unit and furthermore in a lower margin per unit.
Therefore the only way of explaining the lower profitability is that more of the flavored gum is being now sold than flavorless gum.
The profit margin has declined because sales of flavored chewing gum, the product with a lower profit margin, have increased while sales of flavorless chewing gum have remained constant.
To improve the profit margin, the interviewee can suggest both short-term and long-termsolutions.
Negotiatelower prices with current suppliers
Look for other suppliers
Buy in bulk to reduce per-unit costs
Release new products (e.g.: low-calorie gum or sugar-free gum) with better profit margins
Increase product prices. However, our client risks losing sales if customers are very price elastic. (Before increasing product prices, we should conduct price elasticity.)
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