What are the real savings?

Question

The case gives these numbers:

Old costs with low price per napkin: 128.8M
New costs with low price per napkin: 51.5M
New costs with high price per napkin: 103.0M
Number of dispensers is 120,000

To calculate the savings, the case suggests that it is 1.-2. = 77.3M

To calculate breakeven, the case suggests that the difference in the costs is 1.-3. divided by 4. to get the maximum price for a dispenser.

The real savings should be 1-3 and not 1-2 or am I wrong? To me, it did not make sense to calculate the new costs with the old napkin price since the difference between the two solutions is only 25.8M and not 77.3.

(One may think we could just divide the 77.3 by two because the price is twice as much, however this is a mistake because we are talking about savings and not actual costs. Hence, the difference between the 77.3 - 25.8 is higher than 77.3 divided by 2.)

Answer 1

Hi,
you are right. In fact, in the breakeven calculation, it considers the correct saving. The error is even in the timing of releasing the data about cost of new napkin: it reveals it costs 1cent only after have found the saving

Best,
Antonello