Question 3 - Math

Question

Why is the calculation:

New cost/revenue ratio = 45% – ( 3 * 5%) = 30%
New gross profit % = 1-30% = 70%
New sales/day = 300 * (1-30%) = 210
New revenue = 210 * 9 = ~ 1.900 EUR
New absolute gross profit for Pizza = ~ 1.300 EUR (vs old one of 1.500 EUR) ?

In the text it says that the cost7revenue ratio decreases of 5 %. Before it was 45%, and reducing it by 5% points makes it 40, doesn't it? Same with the number of sales. Before it was 300 pizzas sold, minus 10% would be 270 sales of pizza in my opinion and not 210 like in the solution.

Can anyone help maybe?

Answer 1

Hello!

You need to multiply the 5 percentage points by 3, given that they say the cost / revenue ratio would decrease by 5 percentage points for each prep item, and then they mention that they would take out 3 prep items (so 5 p.p. * 3 = 15 p.p.). Same with sales, they would decline by 10% for each prep item, so they would decline by 10% * 3 = 30% total.

Hope this helps!

Maria

Answer 2

Hey there,

The 5% reduction in cost / revenue ratio is per item. So since we are removing 3 items, it is 3 x 5% = 15% reduction in cost / revenue ratio. That's why the new ratio becomes 45% - 15% = 30%

The same concept holds with the 10% reduction in sales per day. The 10% reduction corresponds with 30 pizzas per day per item, so since the question says we will be reducing 3 items, it means a total reduction of 90 pizzas. Therefore it is 210 pizza sales per day

Hope that helps!

All the best

Answer 3

You have it here: "New cost/revenue ratio = 45% – ( 3 * 5%) = 30%"

Gross margin is reduced 5% per item, so it goes from 45% to 30%, not from 45% to 40%.