Why sales from initial orders /catalogs sent?

Question

I don't get it why it divides initial orders /catalogs sent while you added repeat orders*order price (100,000) which gives us a total of 500,000 in revenue. Nevertheless, you divide 500 (which contains the sales from repeat orders + repeat orders) and you only divide it by the catalogs sent (200,000).

Wouldn't it be pertinent to divide the revenue by 201,500 so to contain the nb of repeat orders as well and not by 200,000?

Answer 1

Hi there,

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Answer 2

Dear,

I'd like to clarify the distinction between catalogs and orders, as they are two entirely different variables. Adding them together, as suggested (i.e., 200,000 + 1,500), is not accurate because it's like comparing apples to oranges.

The starting point of this case is to estimate total annual revenues:

Total Revenues = Initial Orders + Reorders

From the available data, we only have information about the monetary value of initial orders ($400,000) but not for reorders (we only have the quantity sold). Therefore, the key assumption here is that the average price per initial order equals the average price per reorder.

This assumption, while not definitive, is a reasonable one. Thus, the case calculates this average price by examining the initial orders and then multiplies this average by the quantity of reorders.

Now that we have an estimate of total revenues, we can determine how much revenue each catalog sent to potential clients generates. This addresses your question. Not every catalog leads to an order; it's akin to distributing flyers or sending promotional emails, with the hope of converting a portion of recipients into customers.

To illustrate, consider a lemonade shop that distributes 1,000 flyers across the neighborhood and sells 100 lemonades at $1 each. The total revenue is $100 (with an average price of $1 per lemonade), but the average revenue generated by each flyer is $0.10 ($100/1,000).

I hope this clarifies the distinction. If you have further questions, please feel free to ask.

Best regards,
Antonio