June 20th, 2010

Preparing for McKinsey PST: Fiji Cola explained

Today I was trying to go through the McKinsey Problem Solving Test (PST) example I found on the net, it's called Fiji Cola.

Here is a brief explanation of the answers:

Team A:
1. Here are some pieces of information which the managing director....

I and II - Even given I and II together - we will now how much cola is currently produced on the archipelago, but how much can be sold is still unknown, since we don't know whether all the currently produced volume covers the demand fully or partially. These options are OUT.

III - This is in! This is basically the current satisfied demand. So this is the minimal volume of cola, that people of Fiji consume per person.

IV - For one thing we don't know what's in the marketing survey. For another - it was in 1998, what is it now? This option is OUT.

V - This one in combination with III stays for the overall Fiji current satisfied demand. Multiplied, this gives the total current consumption of cola of Fiji archipelago. This one is IN.

Answer: D

2. In investigating some of the specific reasons why competitors brands are winning market...

OK, we are looking here for the reasons for larger revenue (i.e. "winning market share").

I - advertising really helps getting revenue boosted. This option is IN.

II - cheaper prices also help to win the market. This option is IN.

III - production facility quality does not automatically states that their product is better (the raw material they use can be actually worse). So this does not tell whether their product is better and cannot be considered a reason. This one is OUT.

IV - Distribution makes a better revenue! This is just logical that ubiquity wins the market. This option is IN.

V - This is too general and does not say much. This option is OUT.

Answer: B

3. By how much, in $m, did Fiji Cola's sales revenue fall ...

This is where we need to look at the Column Chart and the table at the top of the Case.
The Columns will tell what was a share of Fiji Cola that year. The table will say what the overall Fiji Cola sales were.
By multiplying percentage of the column to the table number, we will get the revenue of Fiji Cola that year.

So, for 1985:
83% * 2.72m = 2.26m (revenues of Fiji Cola in 1985)

For 1997:
51% * 2.88m = 1.47m (revenues of Fiji Cola in 1997)

Now, from the answer, we need the fall of the revenue, which means we need subtract the latter from the former:
2.26m - 1.47m = 0.79m

Answer: C

4. Tom Paradise, Fiji Cola's sales manager, tells you that all sales...

Here we need to look at the table right above the question, and add the data Tom provided to that table. Add a new row "Fiji Cola sales price" 1.22 to North and South, 1.27 to West, and X to East, since it's not known.
Then, since we know that $88,000 was paid to sales salary including sales incentives. And 25% of that sum, were incentives.
So $88,000 * 25% = $22,000 of incentives were paid.

From the data above the chart, we know that incentives are paid per litre - 10% over $1.12. So the total sales were $22,000 * 10 = $220,000.
So here we come with the equation to figure out X:

(1.22 - 1.12) * 0.5m + (1.22 - 1.12) * 0.4m + (X - 1,12) * 0.4m + (1.27-1.12) * 0.6 = $220,000
In other words - all sales above store minimal = $220,000
From here we have X = 1.22

Answer: B

5. Tom informs you that the minimum price for the sales is calculated to allow a....

Ok so we have here: 80c of cost of production per litre. The final store price to the end customer, depending on the region, is in the table and fluctuates from 1.45 to 1.55.
Also we have the price at which the store buys it from Fiji Cola, it's 1.22 for all stores, except West - 1.27. However here it's not relevant for this particular question. The question says that in this case we need to take the minimum price ($1.12 for all cola)

We also have the total of litres sold to customers in the table: 0.5m, 0.4m, 0.4m, 0.6m.

Step 1 Let's find the production cost of all cola
0.5m * 0.8 + 0.4m * 0.8 + 0.4m * 0.8 + 0.6m * 0.8 = $1.52m
(0.8 above is 80 cents given in the question)

Step 2 Let's find out the revenue (not profit yet) that Fiji Cola receives when selling the product to the stores:
0.5m * 1.12 + 0.4m * 1.12 + 0.4m * 1.12 + 0.6m * 1.12 = ~$2.13m

Step 3 Let's find out the revenue of stores sending the Fiji Cola to customers:
0.5m * 1.5 + 0.4m * 1.45 + 0.4m * 1.55 + 0.6m * 1.50 = $2.85m

Ok so our answer is to take profit of stores (revenue of stores MUNIS revenue of Fiji Cola) and divide by overall profit (revenue of stores MINUS production cost):
(2.85-2.13) / (2.85-1.52) = 0.47 / 1.33 = ~54.1% which rounds up to 55%

Answer: C

Let me know if you need the second part of this test (Team B) explained..