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Anonymous A

on Sep 04, 2023

Global

Question about

Calculation fixed overhead costs

I have a question about the calculation of the allocated fixed overhead costs. When calculating the margin of 8% only fixed costs (Personnel and Store rent) are taken into consideration and variable costs e.g. purchase prices are ignored. Therefore, the 8% only represents the profit margin after fixed costs if I am not mistaken. When calculating the fixed overhead costs, however, the 8% margin is applied as if it represents the profit margin after all costs (including purchase prices). For me, this seems inconsistent and I don´t really understand why this is possible.

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Cristian

Coach

on Sep 12, 2023

#1 rated MBB & McKinsey Coach

Hi there!

I see you received a lot of help in the meantime.

Sharing with you an additional article that you might find helpful - it's a collection of all the typical terms you're likely to come across in an interview:

Free Guide: The Must-Know Consulting Terms for Interviews

Best,
Cristian

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Ian

Coach

on Sep 04, 2023

Hi there,

Really hard to assist without more information.

Can you please point to the exact part of the case where this calculation occurs (and provide screenshots).

Help us help you!

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2 comments

Anonymous A

on Sep 04, 2023

Hi, my question is related to the calculations performed in Question 2 of the solution "Why can other competitors offer lower prices?" (page 7-9)

Anonymous

on Sep 06, 2023

I can also add as per the previous comment above: The costs of the business at the top level are calculated as the fixed costs i.e. the rent and the staff salaries. This gives a margin of 8%. This margin of 8% is then used as a justification for the profit margin of the product. However, The business's margin cannot be 8% since it also incurs a variable cost given that it purchases the product at a price of €30, as per the case notes. How can the 8% calculated as the business margin be the same as the product's profit margin?

Charlotte

on Nov 10, 2023

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

Sophia

Coach

on Sep 05, 2023

Top-Ranked Coach on PrepLounge for 3 years| 6+ years of coaching

Hello,

Would you mind walking us through the calculation you are referring to in more detail? I'm not sure that I fully follow.

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3 comments

Anonymous A

on Sep 05, 2023

Hi, so my question refers to Question 2 in the solution "Why can other competitors offer lower prices?" (page 7-9). First, the margin for BeautyCo is calculated by deducting fixed costs (Personnel costs and store rent) from the revenue resulting in a margin of 8%. Variable costs e.g. the purchasing price is ignored here. So if I am not mistaken, the 8% only represent the profit margin after fixed costs not after total costs. However, in the next step when fixed overhead costs are calculated, fixed costs AND variable costs (purchasing price) are deducted from the revenue (sales price) and equated with the 8% margin, implying the 8% represent the profit margin after total costs. This seems inconsistent to me, because when calculating the 8% margin only fixed costs are taken into consideration, but when applying the 8% margin, fixed costs AND variable costs are taken into account

Anonymous B

on Sep 06, 2023

I can also add: The costs of the business at the top level are calculated as the fixed costs i.e. the rent and the staff salaries. This gives a margin of 8%. This margin of 8% is then used as a justification for the profit margin of the product. However, The business's margin cannot be 8% since it also incurs a variable cost given that it purchases the product at a price of €30, as per the case notes. How can the 8% calculated as the business margin be the same as the product's profit margin?

Jens

on Sep 15, 2023

Please see my new comment. I think you are right; there is a flaw in the solution of question 2.