Why is purchase price not included in total revenue?

Question

We calculate the company's total revenue as 1B euros. If the sample product has a purchase price of 30 euros out of a sale price of 60 euros, does that not mean that overall, 500M euros of the company's revenue goes towards purchasing the products for sale? And if so, then the speculated overhead costs of 920M would surpass the remaining 500M of revenue that needs to cover overheads and profit.

In general, do market charts like Exhibit 1 exclude purchase price? This would be odd, given that different companies have different purchase prices, and that is part of their internal operations

Answer 1

Hi Ben!

I see you received clarifying answers already.

Sharing with you a few other cases that are highly rated and which are based on recent interviews (plus, they contain interviewer notes):

Best,
Cristian

Answer 2

Hi,

I took a quick look at the case. Indeed it is quite confusing and probably that's why its not a high rated case. If 8% is the overall net margin for our client, than that margin has to include total variable costs as well (which t case doesn't in this in the first average margin calculation).

In general, market charts like Exhibit 1 (the variwide graph) will not include purchase price:

The charts are normally meant to express revenue / sales for which you do not need purchase price
In reality, purchase price would be confidential as well so hard to get this

All the best!

Answer 3

Hi there,

Benjamin is exactly right! I've aim for cases that are 4-star and above as it's a good indicator of the quality of the case!

Answer 4

Thank you for your question. We have reviewed and adjusted the case. We hope it is more clear now, and let us know if you have further feedback. Your PrepLounge team