How-to-calculate-service-margin

How to calculate service margin | 9 Exercises

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Crystal Consulting

States :

Crystal Consulting is a young company specializing in strategic consulting for technology startups. At the end of the year, the company wants to evaluate its profitability by calculating the net margin of its various consulting services. Currently, it offers a strategic consulting session at €1 excluding tax per hour. The associated costs for the service are estimated at €000 per hour.

Work to do :

  1. Calculate the unit margin for a strategic consulting session.
  2. Determine how to increase the selling price to achieve a 50% margin rate.
  3. Analyze the impact of a 10% reduction in service costs on the current unit margin.
  4. Evaluate the markup rate with current data.
  5. Discuss the strategic implications of improving the margin rate for the company.

Proposed correction:

  1. Unit margin:
    The unit margin is calculated by subtracting the purchase price excluding tax (PA HT) from the sale price excluding tax (PV HT).
    Unit margin = PV excluding tax – PA excluding tax = €1 – €000 = €600.
    This results in a unit margin of €400 for each hour of consulting.

  2. Increase in the selling price:
    To obtain a margin rate of 50%, the formula is:
    PV HT = PA HT ÷ (1 – Margin rate) = €600 ÷ (1 – 0,50) = €1.
    To achieve a 50% profit margin, Crystal Consulting must increase its prices to €1 per hour.

  3. Impact of cost reduction:

If costs decrease by 10%, the new costs are: €600 – (10% of €600) = €600 – €60 = €540.
New unit margin = €1 – €000 = €540.
The cost reduction increases the unit margin to €460, a gain of €60.

  1. Mark rate:
    The markup rate is calculated with the formula:
    Markup rate = ((PV HT – PA HT) ÷ PV HT) x 100 = ((€1 – €000) ÷ €600) x 1 = 000%.
    The current markup rate is 40%.

  2. Strategic implications:
    Improving the margin rate can increase Crystal Consulting's overall profitability and financial strength, which can support its future investments in developing innovative services.

Formulas Used:

Title Formulas
Unit margin PV HT – PA HT
PV HT for margin rate PA HT ÷ (1 – Margin rate)
Brand taxes ((PV HT – PA HT) ÷ PV HT) x 100

GreenTech Solutions

States :

GreenTech Solutions offers a software solution dedicated to optimizing energy resources for businesses. During this period, they are looking to adjust their pricing in order to improve their profitability. Currently, an annual license is sold at €2 excluding VAT, and its cost price is €500.

Work to do :

  1. Determine the unit margin generated by each license sold.
  2. Calculate the current margin rate for GreenTech Solutions.
  3. Propose a new selling price to achieve a 30% markup rate.
  4. Evaluate the consequences of a 5% reduction in cost price.
  5. Discuss the importance of margin to this technology company.

Proposed correction:

  1. Unit margin:
    The unit margin is obtained by calculating the difference between the PV HT and the PA HT.
    Unit margin = PV excluding tax – PA excluding tax = €2 – €500 = €1.
    Each license sold generates a unit margin of €1.

  2. Current margin rate:
    The margin rate is assessed using:
    Margin rate = ((PV HT – PA HT) ÷ PA HT) x 100 = ((€2 – €500) ÷ €1) x 500 = 1%.
    The current margin rate is 66,67%.

  3. New sale price for 30% markdown rate:

The formula used is:
PV HT = PA HT ÷ (1 – Markup rate) = €1 ÷ (500 – 1) = €0,30.
To achieve a 30% markup, the price would have to be reduced to €2.

  1. Reduction in cost price:
    A cost price reduced by 5% results in: €1 x 500 = €0,95.
    New unit margin = €2 – €500 = €1.
    This improves the unit margin to €1 per license.

  2. Importance of margin:
    For GreenTech Solutions, a good margin is crucial to finance research and development as well as to maintain long-term competitiveness in the technology market.

Formulas Used:

Title Formulas
Unit margin PV HT – PA HT
Margin rate ((PV HT – PA HT) ÷ PA HT) x 100
Price for mark rate PA HT ÷ (1 – Mark rate)

BioFood Gourmet

States :

BioFood Gourmet is a caterer specializing in organic and sustainable dishes. For its new range of meals, the company wants to determine profitability by calculating the unit margin of each dish. The selling price excluding tax of a dish is set at €20, with a production cost of €12.

Work to do :

  1. Calculate the unit margin for each dish sold.
  2. Determine the current margin rate with the data provided.
  3. What would the new unit margin be if the production price increased by 15%?
  4. If BioFood Gourmet wanted a 25% markup, what would be the ideal selling price?
  5. Explain the implications of increasing unit margin for business sustainability.

Proposed correction:

  1. Unit margin:
    To obtain the unit margin, use the following formula:
    Unit margin = PV excluding tax – PA excluding tax = €20 – €12 = €8.
    The unit margin for each dish is €8.

  2. Current margin rate:
    The margin rate is calculated as follows:
    Margin rate = ((PV HT – PA HT) ÷ PA HT) x 100 = ((20 € – 12 €) ÷ 12 €) x 100 = 66,67%.
    The current margin rate is 66,67%.

  3. Increase in production cost:

With a 15% increase, the cost reaches: €12 x 1,15 = €13,80.
New unit margin = €20 – €13,80 = €6,20.
The unit margin would decrease to €6,20.

  1. Selling price for 25% markup rate:
    Let's use the formula:
    PV HT = PA HT ÷ (1 – Markup rate) = €12 ÷ (1 – 0,25) = €16.
    A markup rate of 25% would require a sale price of €16.

  2. Implications of margin increase:
    A higher unit margin would allow BioFood Gourmet to improve its cash flow and reinvest in sustainable packaging and new organic recipes.

Formulas Used:

Title Formulas
Unit margin PV HT – PA HT
Margin rate ((PV HT – PA HT) ÷ PA HT) x 100
Price for mark rate PA HT ÷ (1 – Mark rate)

SilverTec Innovators

States :

SilverTec Innovators is a company that manufactures connected accessories for electric cars. It is currently evaluating the profitability of a module sold for €450 excluding VAT, with a production cost of €300.

Work to do :

  1. What is the unit margin made on each module sold?
  2. Calculate the current markup rate for SilverTec Innovators.
  3. If the cost decreases by €20, how will this affect the unit margin?
  4. Adjust the selling price to achieve a margin rate of 40%.
  5. Analyze the strategic effects of increasing the unit margin on the company's competitiveness.

Proposed correction:

  1. Unit margin:
    Let's calculate the unit margin with the equation:
    Unit margin = PV excluding tax – PA excluding tax = €450 – €300 = €150.
    The margin on each module is €150.

  2. Mark rate:
    The markup rate is calculated as follows:
    Markup rate = ((PV HT – PA HT) ÷ PV HT) x 100 = ((450 € – 300 €) ÷ 450 €) x 100 = 33,33%.
    The markup rate is currently 33,33%.

  3. Reduction of production cost:

With a cost reduction of €20, the cost price is: €300 – €20 = €280.
New unit margin = €450 – €280 = €170.
The margin is increased to €170.

  1. Selling price for 40% margin rate:
    Let's use the following formula:
    PV HT = PA HT ÷ (1 – Margin rate) = €300 ÷ (1 – 0,40) = €500.
    To reach this rate, the module would have to be sold for €500.

  2. Strategic effects of margin increase:
    A higher unit margin would give SilverTec Innovators greater flexibility to invest in new product development and marketing strategies, thereby strengthening its market position.

Formulas Used:

Title Formulas
Unit margin PV HT – PA HT
Brand taxes ((PV HT – PA HT) ÷ PV HT) x 100
PV HT for margin rate PA HT ÷ (1 – Margin rate)

PureWater Cosmetics

States :

PureWater Cosmetics manufactures skincare products based on thermal water. The company currently sells a moisturizing cream for €60 excluding VAT, with a production cost of €35 per unit.

Work to do :

  1. Calculate the unit margin on each cream sold.
  2. Determine the current margin rate for the company.
  3. What impact would a 10% reduction in costs have on unit margin?
  4. Find the selling price required to apply a 20% markup rate.
  5. Discuss the operational implications of the margin adjustment for PureWater Cosmetics.

Proposed correction:

  1. Unit margin:
    The unit margin is obtained by the formula:
    Unit margin = PV excluding tax – PA excluding tax = €60 – €35 = €25.
    The margin is therefore €25 per cream sold.

  2. Margin rate:
    This is calculated as follows:
    Margin rate = ((PV HT – PA HT) ÷ PA HT) x 100 = ((60 € – 35 €) ÷ 35 €) x 100 = 71,43%.
    The margin rate is currently 71,43%.

  3. Cost reduced by 10%:

A reduced cost means a decoy of: €35 x 0,90 = €31,50.
New unit margin = €60 – €31,50 = €28,50.
The margin therefore amounts to €28,50.

  1. Selling price for 20% markup rate:
    Let's use the formula:
    PV HT = PA HT ÷ (1 – Markup rate) = €35 ÷ (1 – 0,20) = €43,75.
    A markup rate of 20% would require a sale price of €43,75.

  2. Operational implications of margin adjustment:
    A better unit margin could allow PureWater Cosmetics to invest more in sourcing quality raw materials, thereby limiting supply and production risks to ensure customer satisfaction.

Formulas Used:

Title Formulas
Unit margin PV HT – PA HT
Margin rate ((PV HT – PA HT) ÷ PA HT) x 100
Price for mark rate PA HT ÷ (1 – Mark rate)

DigitalStudio Web

States :

DigitalStudio Web is a website creation agency specializing in e-commerce platforms. Currently, a complete project is sold at €5 excluding VAT, with a service cost of €000.

Work to do :

  1. What is the unit margin for each complete project sold?
  2. Calculate the markup rate for the agency.
  3. If the cost of services increases by 15%, how will this affect the unit margin?
  4. Establish the selling price needed to have a 50% margin rate.
  5. Explain the importance of optimizing margin for this business sector.

Proposed correction:

  1. Unit margin:
    Let's calculate this margin as follows:
    Unit margin = PV excluding tax – PA excluding tax = €5 – €000 = €3.
    So the margin per project is €1.

  2. Mark rate:
    This rate is evaluated using the formula:
    Markup rate = ((PV HT – PA HT) ÷ PV HT) x 100 = ((€5 – €000) ÷ €3) x 500 = 5%.
    The markup rate is 30%.

  3. 15% cost increase:

This changes the cost of services to: €3 x 500 = €1,15.
New unit margin = €5 – €000 = €4.
This reduces the margin to €975.

  1. Price required for a 50% margin rate:
    Let's use the following formula:
    PV HT = PA HT ÷ (1 – Margin rate) = €3 ÷ (500 – 1) = €0,50.
    Such a margin rate imposes a price of €7.

  2. Importance of optimizing margin:
    In the web design industry, a higher margin allows the agency to develop proprietary tools, hire creative talent, and provide responsive customer service, which is essential to stand out from the competition.

Formulas Used:

Title Formulas
Unit margin PV HT – PA HT
Brand taxes ((PV HT – PA HT) ÷ PV HT) x 100
PV HT for margin rate PA HT ÷ (1 – Margin rate)

EcoRide Bicycles

States :

EcoRide Bicycles, a manufacturer of eco-friendly bicycles, must redefine its pricing strategy to increase profitability. Each bicycle is sold at €600 excluding VAT with a production cost of €400.

Work to do :

  1. Calculate the unit margin for each bike sold.
  2. Determine the current margin rate for the company.
  3. If production costs were to fall by 10%, how would the unit margin change?
  4. Determine the selling price needed to achieve a 35% markup rate.
  5. Discuss the potential strategic benefits of increasing margins for EcoRide Bicycles products.

Proposed correction:

  1. Unit margin:
    Let's use the formula:
    Unit margin = PV excluding tax – PA excluding tax = €600 – €400 = €200.
    Each bike sold generates a unit margin of €200.

  2. Current margin rate:
    This rate is obtained as follows:
    Margin rate = ((PV HT – PA HT) ÷ PA HT) x 100 = ((600 € – 400 €) ÷ 400 €) x 100 = 50%.
    The margin rate currently is 50%.

  3. 10% cost reduction:

This results in a cost of: €400 x 0,90 = €360.
New unit margin = €600 – €360 = €240.
The increased margin is then €240.

  1. Price for a 35% markup rate:
    Formally:
    PV HT = PA HT ÷ (1 – Markup rate) = €400 ÷ (1 – 0,35) = €615,38.
    To achieve this goal, the sales price should be €615,38.

  2. Strategic benefits of increasing margins:
    Increased margins would allow EcoRide Bicycles to invest further in continued improvement of sustainability and material efficiency, strengthening the company's position in the green market.

Formulas Used:

Title Formulas
Unit margin PV HT – PA HT
Margin rate ((PV HT – PA HT) ÷ PA HT) x 100
Price for mark rate PA HT ÷ (1 – Mark rate)

SunGlaze Solar Panels

States :

SunGlaze Solar Panels is a company that sells solar panels for €800 excluding VAT. The unit production cost is €500. They are looking for ways to improve the margin on their sales.

Work to do :

  1. Calculate the unit margin for a solar panel.
  2. What is the current markup rate for SunGlaze Solar Panels?
  3. If costs were reduced by €20, what would be the impact on unit margin?
  4. Find the selling price required for a 30% margin rate.
  5. Analyze the potential competitiveness gains associated with a higher margin.

Proposed correction:

  1. Unit margin:
    The formula to use is:
    Unit margin = PV excluding tax – PA excluding tax = €800 – €500 = €300.
    Each panel brings in a margin of €300.

  2. Mark rate:
    This rate is calculated as follows:
    Markup rate = ((PV HT – PA HT) ÷ PV HT) x 100 = ((800 € – 500 €) ÷ 800 €) x 100 = 37,5%.
    The markup rate is 37,5%.

  3. Impact of cost reduction:

With a decrease of €20, the cost becomes €500 – €20 = €480.
New unit margin = €800 – €480 = €320.
The margin is now €320.

  1. Price for a 30% margin rate:
    Let's use the formula:
    PV HT = PA HT ÷ (1 – Margin rate) = €500 ÷ (1 – 0,30) = €714,29.
    A price of €714,29 allows this objective to be met.

  2. Competitive gains linked to an increased margin:
    A higher margin would allow SunGlaze Solar Panels to reinvest in R&D and improve product quality, which is essential to maintain a leading position in a highly competitive industry.

Formulas Used:

Title Formulas
Unit margin PV HT – PA HT
Brand taxes ((PV HT – PA HT) ÷ PV HT) x 100
Price for margin rate PA HT ÷ (1 – Margin rate)

VitalSports Equipments

States :

VitalSports Equipments, a sports equipment supplier, is selling a new treadmill for €1 excluding VAT, with a production cost of €200. The company needs to improve its profitability and requires a margin analysis.

Work to do :

  1. Determine the unit margin for each treadmill.
  2. Calculate the current margin rate with this data.
  3. How would unit margin change if costs fell by 10%?
  4. What selling price would achieve a 40% markup rate?
  5. Discuss the benefits VitalSports Equipments would have in increasing its margins in the sports industry.

Proposed correction:

  1. Unit margin:
    To do this, consider the formula:
    Unit margin = PV excluding tax – PA excluding tax = €1 – €200 = €800.
    This translates into a unit margin of €400 per carpet.

  2. Margin rate:
    Let's calculate this rate via:
    Margin rate = ((PV HT – PA HT) ÷ PA HT) x 100 = ((€1 – €200) ÷ €800) x 800 = 100%.
    The margin rate is currently 50%.

  3. Change in unit margin with cost reduction:

A 10% reduced cost means: €800 x 0,90 = €720.
New unit margin = €1 – €200 = €720.
The increased margin would then be €480.

  1. Price for a 40% markup rate:
    Let's use the following formula:
    PV HT = PA HT ÷ (1 – Markup rate) = €800 ÷ (1 – 0,40) = €1.
    A sale price of €1 would be required.

  2. Benefits of increasing margins:
    In the sports industry, a better margin would allow VitalSports Equipments to position itself as an innovation leader, with the possibility of integrating the latest technologies and establishing partnerships with prestigious sports clubs.

Formulas Used:

Title Formulas
Unit margin PV HT – PA HT
Margin rate ((PV HT – PA HT) ÷ PA HT) x 100
Price for mark rate PA HT ÷ (1 – Mark rate)

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