MyConsultingCoach

Problem Solving Test

Practice Test 2

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Instructions

MyConsultingCoach Problem Solving Test

Practice Test Overview and Instructions
This practice test has been developed to provide a sample of the actual McKinsey Problem
Solving Test used for selection purposes. This test assesses your ability to solve
business problems using deductive, inductive, and quantitative reasoning. As the official
test, this practice case contains a total of 26 questions and should be completed in 60
minutes.

Similar to the real test, this test contains an answer sheet at the end. Make sure to allocate
enough time to transfer all your answers to the answer sheet. The answer sheet will be the
only document used to assess your performance, any answer present in the booklet but not
in the answer sheet will not contribute to your final score.

While completing this practice test, do not use any electronic devices (e.g., calculator,
computer) when performing calculations to answer the questions. Electronic devices will
not be permitted to be used during the actual test administration. Also, during the actual
test administration, you may use all blank space in the test booklet as scratch paper to as-
sist you in performing any calculations and recording any notes. No scratch paper will be
allowed.

The practice scenarios begin on the next page of this booklet. Only consider information
contained within the scenario when determining your answer. Considering all information
presented within the scenario is critical to answering questions correctly.

After you have completed the test, score your answers using the solutions located at the
end of this booklet and identify your areas of strength and weakness with our performance
radar.
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Livingsocial

Livingsocial
Livingsocial is the second largest Online Travel Agency (OTA) in Europe
providing flight and hotel booking services. Livingsocial gets its revenue from
commissions charged to hotels and airlines as a share of the booking value.

Over the last 5 years the online travel industry witnessed an increase in cus-
tomer acquisition costs due to the growing importance of new channels:
 Metasearch engines, allowing customers to compare different online travel
agencies, make it easier to consistently find the lowest prices available
 Search engines, charging high cost for advertising in search results due to
increased competition from other online travel agencies and hotel chains

Both metasearch engines and search engines charge Livingsocial a pay-per-

click commission (i.e. every time visitors click on the logo, Livingsocial gets
charged regardless of whether visitors complete a booking). The main impact
of the above changes is that direct bookings (i.e. visitors who went directly to
the Livingsocial website) were gradually replaced by bookings redirected from
other channels.

Livingsocial asked your team to overhaul its strategy, aiming at reducing cus-
tomer acquisition costs to prop up profitability. Exhibit 1 shows the a gradual
decline in profit margin over the last 9 months.
Exhibit 1
Revenue and profit margin, January=100
4

Livingsocial

1. Which of the following can be inferred from Exhibit 1?

A. Livingsocial made more profit in May than it did in August
B. The rate of increase in revenue from January to September is the same
as the rate of decrease in profits
C. Livingsocial made a greater profit in January than in April

D. Between August and September profit margin declined by a higher

percentage than the increase in revenue

The research manager at Livingsocial gives you five facts regarding Metasearch
engines growth over the last year:

I. Livingsocial charges occasionally lower but usually higher prices than

competitors
II. Metasearch engines compare offers from all online travel agencies for a
given hotel, enabling customers to choose the cheapest
III. Metasearch engines charge online travel agencies based on the number of
clicks their offer gets
IV. Unlike most competing online travel agents, the Glassform group
(Livingsocial’s parent company) does not own a metasearch engine
V. Metasearch engines are growing their market share in the markets where
Livingsocial has a strongly established presence

2. Which combination of the five facts above would be sufficient to help explain
the contribution from metasearch to the trend in Livingsocial profit margins
over the last 9 months?
A. I, II, IV
B. I, II, V
C. III, IV, V
D. II, III, V
5

Livingsocial

Livingsocial has asked your team to help devise the strategy with the highest re-
turn on investment for metasearch. Metasearch engines compare prices for the
same flight or hotel from different online travel agents (OTAs).

Metasearch engines usually show the prices from 4 online travel agents for the
same property, ranking them from position 1 to position 4. Position is highly
correlated with visibility to travellers, since position 1 implies a big, immediately
visible logo of the online travel agent and position 2 to 4 have smaller logos in a
menu that has to be unhidden by the users. Prices of different positions are
based on a bidding process in which online travel agents bid for their preferred
position for different properties on a daily basis. The main elements of the anal-
ysis are:
 Cost per click: how much online travel agents commit to pay in the bidding
process for any click end users make on their logo on the metasearch engine
 Clicks/day: average number of clicks the online travel agent receives on aver-
age. Higher positions get more clicks due to better visibility
 Conversion rate: percentage of website visitors clicking on a property that
makes a purchase
 Average booking value: average booking value on a given OTA only for cus-
tomers actually making a booking (only customers who convert, does not
take into account customers who click and then leave the OTA website)

Your team interviewed the marketing manager who has been in charge of the
metasearch bidding process. He suggests to avoid position 1, since in his view
lower returns make it much less attractive than positions 2-4.

Exhibit 2 shows the above criteria applied to position 1 to 4 in a metasearch en-

gine website.
6

Livingsocial

Exhibit 2
Cost and revenue by position on main metasearch engines

3. In a given day by which percentage should the average booking value of posi-
tion 3 increase so that it becomes the most profitable by click?
A. 28%
B. 26%
C. 20%
D. 18%
7

Livingsocial

4. Which of the following statements IF TRUE would NOT challenge the Mar-
keting manager’s statement that “lower returns in position 1 make it much
less attractive than positions 2-4”?
A. Position 1 creates strong brand awareness among the public, regardless
of visitors booking decision
B. Conversion rate is growing ~9% year on year in position 1, 5% in posi-
tion 2 and 3% in position 4-5
C. After 3 months of consistently appearing in position 1, online travel
agencies see direct bookings on their website increase 13%, with poten-
tial savings in terms of advertising and cost-per-click marketing
D. While the statistics for conversion rates in position 1 are averages of
different online travel agents in position 1 for different properties, re-
search has shown that being in position 1 on all properties almost dou-
bles conversion rate

5. Which of the following research would best inform the decisions about
position?
A. A benchmark of competitors booking details clustered by their position
on metasearch engines
B. An analysis of the conversion rates of main competitors by position
C. A correlation study between position on metasearch and brand
recognition for all the main online booking agencies, including
Livingsocial
D. Share by position of customers completing their next bookings directly
on the Livingsocial website after making their first purchase on
metasearch
8

Livingsocial

The second expensive channel Livingsocial gets its visitors from, are search en-
gines. There are two possible ways visitors can get to the Livingsocial website
through search engines:
 Search results: visitors searching for a keyword click on the Livingsocial web-
site in the standard search results. Cost for Livingsocial is limited to optimi-
zing its website for appearing in the search results in as many searches as
possible
 Sponsored search results: visitors searching for a keyword click on the spon-
sored search results at the top of the page. Search engines charge Livingsocial
a variable cost per click.

Livingsocial asked your team to help them optimize spending in sponsored

search results. The main steps of the customer journey for visitors clicking on
sponsored search results is the following:
 Step 1: Customers click on the sponsored search results on the search engine
and get redirected on Livingsocial website. Livingsocial pays the search en-
gine a cost per click.
 Step 2: Customers search on Livingsocial website
 Step 3: Only in a limited percentage of cases customers decide to make a pur-
chase (conversion rate). Livingsocial gets a variable commission.

Visitors on Livingsocial website from different search engines convert into shop-
pers at different rates, and when they convert, they have different average book-
ing values. The Livingsocial team would like to understand which search engines
to prioritize in their sponsored search results based on the expected return on
average investment per click made.

Table 1 shows cost per click, number of clicks and average booking value for ho-
tels, flight and packages (made up of flight ticket + hotel booking) in the last
month. Table 2 shows the weighted average of the variable commission Living-
social got from visitors coming from different booking engines who converted
into shoppers over the last month.
9

Livingsocial

Table 1
Cost per click, number of clicks and average booking value revenue for spon-
sored search results on key search engines, September 2015

Social- Fireblade Tongle

book
Cost per click 0.8 1 1.2

Hotel clicks/day 1,200 500 180

Airline clicks/day 3,000 5,000 1,000

Package clicks/day 500 700 600

Hotel purchases 1.400 500 250

Average hotel booking val- 240 300 160

ue
Airline ticket purchases 300 720 1,050

Average airline booking 205 200 200

value

Table 2
Weighted average variable commission from visitors coming from search en-
gines converting into shoppers, September 2015

Average commission Social- Fireblade Tongle

(%) book
Airline tickets 8% 8% 6%

Hotel bookings 15% 14% 16%

10

Livingsocial

6. Which of the following statements can be inferred from Table 1?

A. Conversion rate for packages on Socialbook is at least 40%
B. Packages on Fireblade are on average less profitable than hotels
C. Less than 5% of airline ticket purchases of visitors from Tongle come
from packages
D. If the average booking value of hotels shoppers coming from Tongle
increased by 33%, average profitability of hotel shoppers from Tongle
would equal average profitability of hotel shoppers from Socialbook

7. Assuming that Socialbook and Tongle both have the same number of clicks/
day and a conversion rate of 10%, what would be the difference in percentage
points between the average profit margin on Airline travel on Socialbook and
Tongle?
A. 14%
B. 37%
C. 51%
D. 258%
11

Livingsocial

In order to maximize direct visitors going to the Livingsocial website without interme-
diate steps in search engines or metasearch, your team has proposed the introduction
of a loyalty program to the company. The structure of the program would be extremely
simple: after 11 nights, customers would get a coupon of the same value of the average
price of the 11 nights that they would be able to spend to book their 12th night on the
Livingsocial website. The team expects this initiative to benefit Livingsocial in two are-
as:
 Increased customer retention and loyalty
 Savings from avoiding to invest on costly pay-per-click campaigns on metasearch
engines and search engines

The Finance Manager acknowledges the positive impacts of this initiative but is con-
cerned about its impact on profitability in a context of shrinking margins.

8. Which of the following is closest to the LOWEST profit margin that would still
make the loyalty investment profitable?
A. 7.7%
B. 8.4%
C. 8.9%
D. 11.9%
12

ERI

ERI
The European research institute or ERI is an organization in established by the Euro-
pean Union to support research on some of the most important challenges connected
to resources and productivity for European Union member states.

Economic growth during most of the 20th century was fuelled by wide availability of
natural resources (e.g. energy, food, water) and raw materials (e.g. steel, copper). In-
creases in demand were more than offset by innovation and technological progress,
leading to higher productivity and lower prices. However the era of stagnating re-
source prices has come to an end in the past 15 years due to the unprecedented de-
mand coming from growth of developing markets. The sustained trend of economic
growth in emerging markets, combined with the resource depletion due to high level
of pollution could potentially further drive up prices, fuelling economic, social, and
environmental risk.

ERI requested your team to forecast the gap between demand and supply of natural
resources in the next 20 years and an assessment of the potential of technological in-
novation in bridging the gap. ERI aims at prioritizing 3-4 critical resources best
matching its current capabilities to focus its research efforts on. Moreover, ERI wants
to restructure European policies of taxes and subsidies for resource utilization in or-
der to create incentives maximizing efficiency.
13

ERI

9. Which of the following most accurately describes the reason for the team’s
project with ERI?
A. The team wants to identify which technologies can best bridge the gap
between existing and future resource needs
B. The team wants to size the share of the gap between existing and future
demand addressable through technological innovation
C. The team aims at identifying the level of additional productivity re-
quired to reduce the delta between supply and demand of key re-
sources
D. The team wants to estimate the level of resources required to meet the
growing demand and the proportion of the gap between future demand
and supply addressable through technological innovation

10. Which of the following analyses would be LEAST appropriate in better

understanding whether policies currently in place are affecting efficiency in
resource utilization?
A. The changes in the use of water resources since the implementation of
subsidized water prices for heavy industries, launched 10 years ago
across Europe to boost production
B. The changes in quantities of food waste disposal occurring in a city
immediately after the implementation of a landfill tax
C. A comparison of fuel usage in agriculture between 2 farms with similar
crops, environmental setting and capital availability in 2 countries with
different subsidies level on agricultural fuel
D. The effect on pollution and traffic after the introduction of subsidized
public transportation
14

ERI

The team proceeds to estimate future demand for key resources in 2020 and the im-
pact of productivity improvements.

Exhibit 1
Gap in demand for key resources

11. What is the ranking of the four resources as a share of 2015 demand
according to the difference between the 2020 demand and the 2015 demand
that CANNOT be met with productivity improvement?
A. STEEL, ENERGY, WATER, LAND

B. WATER, STEEL, ENERGY, LAND

C. WATER, STEEL, LAND, ENERGY
D. STEEL, WATER, STEEL, ENERGY
15

ERI

12. If production of 1 million tons of steel needs 5.5 cubic km of water, which is
the best estimate of how much a reduction of 115 million tons of steel in 2020
demand would reduce the gap between the remaining demand for water in
2020 (after productivity improvements) and the 2015 demand?
A. 45%
B. 50%

C. 55%
D. 60%

The team is requested by ERI management to estimate the cropland needed in 2020 to
satisfy food demand. Growth in cropland demand can be driven by three key factors
 Food demand from population: Changes in demand due increases in population or
increase in average per capita food intake
 Crop demand from industry: Changes in demand due to new industrial processes/
products
 Environmental problems: Progressive depletion and degradation of existing
cropland reducing its productivity

Exhibit 2 shows the contribution of all the above factors towards additional demand of
cropland in 2020. While in 2015 the area dedicated to cropland was approximately
110% of demand, ERI researchers estimate that in case further extensions of cropland
area will be required due to excessive demand, they will most likely come from logging
rainforests, with potentially irreparable damage to biodiversity in many areas of the
planet. In order to minimize the likelihood of this scenario, the client asked your team
to size the productivity increase (additional crop production per hectare) required to
meet the increased demand with the 2015 existing cropland area.
16

ERI

Exhibit 2
Cropland demand by 2020 (Million hectares)

1 40% of biomass from biofuels production is provided to livestock feed, reducing the cropland
used for producing feed crops by 8 millions hectares

13. Assuming that the total area dedicated to cropland is the same in 2020 and in
2015, which of the following is the closest estimate of the increase in land
productivity required in 2020 to compensate ONLY from the land degrada-
tion and climate change (i.e. not for any other factor affecting 2020 de-
mand)?
A. No increase needed
B. 2.3%
C. 2.5%
D. 5%
17

ERI

14. Which of the following can be concluded based on Exhibit 2?

A. Excluding demand related to energy infrastructure and environmental
problems would reduce overall additional demand by 37%
B. Demand from biofuels and energy infrastructure accounts for ~1% of
total additional land demand in 2020
C. If 2020 demand is met, more land will be dedicated to urban
expansion than to biofuels production

D. Doubling bio-fuels production will reduce food/feed demand by less

than 10%

European governments created complex legislation to stimulate production of

key resources in the market through incentives. Since resource production re-
quires long term investments and could make an investment obsolete before its
payback, governments are providing various kinds of subsidies to shorten the
payback period. However subsidies vary widely across Europe and often they
lack a common framework within the same country. The client wants to reor-
ganize incentive policies, focusing subsidies in the sectors with the greatest im-
pact on economic growth and the least environmental harm.

Exhibit 3 shows the return levels for investments in energy, with and without
subsidies, and the annual cost of subsidies.
18

ERI

Exhibit 3
Yearly impact of subsidies on annual returns for main resources in
Europe

15. What is the total capital invested in energy?

A. 800 Mn USD

B. 812 Mn USD
C. 788 Mn USD
D. Cannot be determined
19

ERI

16. Which of the following reasons IF TRUE would be sufficient to explain the
reason why the same level of subsidies for steel and land has different
impacts on returns
A. The invested capital in the steel industry in Europe is 12x the invested
capital in land
B. Investments in the steel industry have longer payback periods than in-
vestments in land

C. Subsidies for investments in the steel industry have a longer duration

than subsidies for land
D. Average margin for the steel industry with market prices is lower than
for land (without incentives)

At the end of the project the team recommends a set of tailored subsidy strate-
gies by sector, taking into account payback period, pace of technological innova-
tion and impact on the environment. The team also points out that for the new
incentive system to work, it is vital to ensure consistency among rules across all
European countries. The Director of ERI is pleased with the advice from the
team and agrees with the logic, but is concerned that most incentive plans al-
ready created by European countries are long-term, multi year plans. Overturn-
ing previous government decisions would meet strong resistance by companies
that already made important investments taking long term incentives into ac-
count.
20

ERI

17. Which of the following statements best reflects the concerns of the ERI
director?
A. He is concerned that a common framework imposing retroactive
measures will never be implemented because local governments and
investors will oppose it

B. He is concerned that the European Union could lose the trust and
potential future investments of key investors who would see the
performance of the investments already made compromised
C. He is concerned that the nature of the proposal would push investors
who already made investments with the current subsidies structure to
actively lobby against it
D. He is concerned that governments will have anyway to sustain
substantial financial outlays from the existing incentive plans due to
their multi year nature
21

Lingo Car

Lingo Car
Lingo Car is a cross-European car dealership group with 250 showrooms across Eu-
ropean countries. Lingo Cars sells new and used cars at the retail level, based on a
dealership contract with the three main European automakers. The company is en-
gaged in two key businesses:

 Car sales, only performed through 2,500 salespeople in the Lingo Cars show-
rooms
 Maintenance services for cars carried out by 1,000 specialized technicians only in
the main branches

Over the last 5 years, the main European car manufacturers have been consistently
trying to move upmarket, repositioning themselves as premium brands in order to
grow their margins. Since car dealers are considered to be the main interface between
a brand and the public, car manufacturers have been increasing their expectations on
car dealers aligning themselves to their new premium corporate identity. This trans-
lated into additional conditions for car dealers including single brand restrictions,
refurbishment to standard look and additional training for salespeople. Moreover, car
manufacturers are investing heavily in the online challenge, aiming at complement-
ing, and possibly replacing in the future, the car dealership structure.

Lingo Car has seen its revenue and profit margin plateauing over the last 10 years due
to the complete saturation of the European Market. Moreover, car manufacturers’
conditions described above added a burden in terms of costs, which did not translate
itself into additional revenue. The CEO of Lingo called your team to estimate the po-
tential impact on the bottom line of the further restrictions that are going to be set
and to evaluate possible actions to increase margins by innovating the way Lingo in-
teracts with its customers. Even if the CEO is aware that the car industry will hardly
be a high growth business in Europe, he is confident that the scale, reach and brand
equity Lingo Car has will enable it to create a new, more compelling value proposition
for its customers integrating both the online and offline channels.

Table 1 shows the average impact of car manufacturers-imposed restriction on a sam-

ple of Lingo Car dealerships. Table 2 shows sales volumes and profitability in differ-
ent areas.
22

Lingo Car

Table 1
Impact of car manufacturers’ restrictions on car dealers

Key conditions Implementation Impact on year-

cost (Thousands ly sales (YoY %
USD) change)

Salespeople re-training 100 +5%

Hiring of technical expert 80 +2%

Interiors refurbishment 350 +2.5%

Exteriors refurbishment 200 +1%

Single brand restriction - -10%

Used cars restriction - -5%

Table 2
Sales and profit margin by area

Current yearly Expected profit

Area
sales (Mn USD) margin, %

Newstock 1.3 5.0%

Bolzano 1.3 4.0%
Stockport 1.9 5.0%
Ventura 2 4.0%
Grange 2.7 1.0%
Selindel 3.2 1.0%
23

Lingo Car

18. Which of the following is closest to the time horizon that would enable ONLY
the initiatives with implementation costs in Table 1 to break even if rolled
out in the Selindel area?
A. 0.3
B. 29
C. 217

D. Break even is not possible

19. Which of the following would make the impact of the restriction on single
brands and used cars neutral in terms of profitability next year in the New-
stock area, assuming sales and profit margin to stay constant unless speci-
fied?
A. Growing sales next year by 15% year on year whilst keeping profit mar-
gin constant

B. Increasing the profit margin to 5.9%

C. Reducing the impact on yearly sales of single brand restrictions to -5%
and growing sales by to 10% next year.

D. Growing profit margin to 15%

24

Lingo Car

20. Assuming that the Single brand restriction is rolled out gradually across the
Lingo Car areas where Lingo operates, what would be the sequence of areas
for roll out that minimizes Lingo Car losses?
A. Grange, Selindel, Bolzano, Newstock, Ventura, Stockport
B. Selindel, Grange, Ventura, Stockport, Newstock, Bolzano
C. Selindel, Grange, Ventura, Stockport, Bolzano, Newstock

D. Stockport, Ventura, Newstock, Bolzano, Selindel, Grange

The CEO of Lingo Car has acknowledged the potentially disruptive impact on
sustainability of the business itself in case all restrictions requested by car man-
ufacturers were implemented maintaining the current margins.

In order to understand the real importance that car dealerships have in deter-
mining level of car sales, the CEO asked your team to identify the main sources
of information customers use in the different phases of their decision journey.
Main sources of information other than car dealers are clustered in three main
areas:
 Personal network: includes information and advice from other people, such
as referrals from friends or colleagues
 Offline sources: include information acquired through newspapers and other
offline sources both through articles and advertising
 Online sources: include information acquired through the internet through
forums, reviews as well as advertising

Exhibit 1 shows the number of touch points with different sources customers
have in the different phases of their decision journey all European brand.
25

Lingo Car

Exhibit 1
Average number of touch points by phase of simplified customer decision
journey

21. Which of the following is most likely to be the reason of the CEO’s request to
understand the driver of car sales?
A. The CEO wants to prioritize other channels where Lingo Car could
build a stronger presence, such as the Online Channel
B. The CEO wants to focus on special initiatives (e.g. open days, presenta-
tion, test drives) to target the phases of the customer journey where car
dealers have more impact
C. The CEO wants to gauge Lingo Car’s bargaining power in getting im-
proved financial terms with car manufacturers
D. The CEO aims at disinvesting some parts of the business if currently
unprofitable
26

Lingo Car

22. Which of the following challenges the conclusion from Exhibit 1 that “Car
Dealerships are still the main driver of car purchase decision”?
A. Most European brands do not have an online ecommerce website al-
lowing visitors to purchase their car online
B. Touch points in car dealerships have decreased by 30% over the past 5
years
C. Touch points at car dealerships are 30% less important than touch
points with the personal network or online reviews in defining the buy-
ers’ decisions
D. Car manufacturers with an ecommerce website saw purchases from
websites outpace purchases in car dealerships

The management of Lingo Cars is considering restructuring the incentive struc-

ture for its salespeople with two main objectives:
 Increase the share of variable cost out of total costs
 Create strong incentives for salespeople to boost sales

Since salespeople are entitled to give tailored discounts to customers, their com-
missions are based on a share of the gross profit margin they are able to produce
per sold car.
The current compensation agreement grants Lingo salespeople a share of the car
price based on the gross profit margin level per card sold.

Table 1 shows the level of commission as a share of car price for different gross
profit margin levels. Exhibit 2 shows the cumulative distribution of car sales by
profit margin in year 0.
27

Lingo Car

Table 1
Commission as a share of car price by gross profit margin level

Gross profit margin (% Commission (% of car

of car price) price)
0%-5% 5%
5%-10% 15%
10%-15% 20%
15%-20% 25%

Exhibit 2
Cumulative distribution cars sold in year 0 by profit margin
28

Lingo Car

23. Assuming that all cars have the same price, what is the difference, as a share
of total commissions with the CURRENT compensation agreement, between
commissions earned on cars sold with a gross profit margin higher than 15%
and cars sold with a gross profit margin lower than 5%?
A. 10%

B. 20%
C. 25%
D. 1,000%

24. Assuming all cars to have the same price and distribution of car sales by gross
profit margin to remain constant, which of the following compensation plans
and sales growth would yield the highest increase in Lingo Cars’ profits?
A. 12% flat commission on all cars regardless of profit margin. Sales
decrease by 10%

B. 15% flat commission on all cars regardless of profit margin. Sales do

not change
C. 20% flat commission on all cars regardless of profit margin. Sales grow
by 30%
D. Current compensation plan
29

Lingo Car

The CEO of Lingo Cars asked your team to identify potential high yield diversi-
fication opportunities in areas where Lingo could exploit synergies with the ex-
isting business. He told your team manager: “We should look for businesses
that require a minimum investment from our shareholders and give returns
much higher than the existing business”.

Your team has identified 5 business opportunities in the maintenance business

where Lingo could leverage its existing infrastructure of service centres. The
main metric your team is adopting is the return on invested capital, i.e. the av-
erage yearly return Lingo’s shareholders would get on their investments.

Table 2 shows a list of the opportunities with the required one-off investment
in year 0, the revenues of the specific markets, the market share Lingo Cars is
expected to get as a share of market revenues and the operating margin as a
share of Lingo Cars revenue.

Table 2
Key financial metrics for selected investment opportunities

Required in- Market rev- Expected Operating

vestment enues market share profit margin
(Millions $) (Millions $) (%) (%)
Glass
Repair 12 1200 8.50% 25%
Body
shop 15 1700 10% 20%
Electric
Shop 20 1300 9% 30%
Trucco 23 800 5% 50%
Car
Rental 25 700 12% 15%
30

Lingo Car

25. Which of the following is LEAST likely to be the reason why the CEO wants to
maximize the return on shareholders’ invested capital?
A. Maximizing company’s operating profit
B. Increasing average return on its business
C. Minimizing shareholders’ capital outlays and selecting only
opportunities with highest returns

D. Send a positive signal to markets about Lingo Car growth by showing

the highest possible operating profit margins

26. By how much approximately, in percentage points, should the market pene-
tration of Glass Repair increase so that it delivers the highest operating profit
of all investment opportunities?
A. 20%
B. 25%

C. 30%
D. 35%
31

Answer sheet
Question Your Question Your
answer answer
1 14

2 15

3 16

4 17
5 18

6 19

7 20

8 21

9 22

10 23

11 24

12 25

13 26
32

Solutions
1 D
Go through the answers and carefully read the relevant exhibit. Remember that the
profit line represents the evolution of a margin, not absolute value:

A. Assuming that January percent profit was x% and revenue was y, this is equiva-
lent to say that 75*x*90y > 80x*120y or 75*90 > 80*120, which is impossible
whatever the value of x and y. INCORRECT

B. Profits = Profit margin * revenue. Therefore while revenue grew 25%, profits
went down by 6% 1.25*0.75 – 1 = -6%. INCORRECT

C. Profits in April were higher, since 0.95*1.15 > 1. INCORRECT

D. Profit margin went down by (75-80) / 80 = -5 / 80, which is higher than the in-
crease in revenues of (120 – 115) / 115 = 5 / 115. CORRECT

2 B

In order to assess the contribution of Metasearch engines, we should look for facts
stating that they have a strong demand in the same markets as Livingsocial and they
are a threat to Livingsocial. Not all combinations provides both the essential facts
above:

A. IV is not relevant. INCORRECT

B. Explains why metasearch is a threat and the growing demand trends. CORRECT

C. IV is not relevant. INCORRECT

D. III by itself does not provide any insights. No explanation about why metasearch
is a threat. INCORRECT
33

3 D

Calculate the expected profit per click by each position as expected revenue (avg.
booking value x conversion rate) – cost per click:

 Position 1: (5% * 250) – 2.40 = 10.10

 Position 2: (6% * 200) – 1.20 = 10.80
 Position 3: (10% * 100) – 1 = 9
 Position 4: (8% * 120) – 0.8 = 8.8

Position 2 has the highest expected profit. In order for position 3 to become as prof-
itable as position 2 its expected profit should be 10.80. Thus, calling the average
booking value x, we have that 10.80 = (10% * x) - 1 and thus x = 118. Average book-
ing value should increase by 18%.

4 B

You are asked which statement would not be a challenge to the Marketing Man-
ager’s statement:

A. Potential challenge, more brand awareness saves investment in advertising. IN-

CORRECT

B. Not a challenge. As stated in introductory paragraphs, bids are reviewed every

week. Position 1 would not be the most profitable even one year from now, since
the delta in growth would not be sufficient to match the profitability of other po-
sitions. Reviewing a bid now if the only advantage that conversion rate will make
it more profitable than other positions in many years from now would make no
sense. CORRECT

C. Potential challenge, more brand awareness saves investment in advertising and

cost per click marketing. INCORRECT

D. Challenge, doubling conversion rate would make the return on investment from
appearing in position 1 the highest of all. INCORRECT
34

5 D
According to the introductory paragraph, Livingsocial’s main criteria for deciding po-
sition is return on investment. You should select the answers that helps the most in
defining the returns from “investing” in metasearch keeping all other characteristics
of the website constant:

A. Benchmark with competitors could reveal potential upgrades for the website but
are not relevant given that the focus is finding the best position keeping all other
factors constant. INCORRECT

B. Benchmark with competitors could reveal potential upgrades for the website but
are not relevant given that the focus is finding the best position keeping all other
factors constant. INCORRECT

C. Helps to assess the impact of metasearch, but value of brand is harder to quanti-
fy than profit from direct visits to Livingsocial website in answer D. INCOR-
RECT

D. Additional profit from additional direct bookings to Livingsocial website is the

most easily quantifiable indicator. CORRECT

6 A
Go through the answers and carefully read the relevant exhibit:

A. Packages = flight + hotel. Look at whether you can infer this from the clicks vs.
purchases of fights and hotel and get the highest of the deltas.

• Hotel: 1.400 hotel purchases and 1.200 hotel clicks: assuming a conversion
rate of 100% for hotels, there are at least 200 hotel purchases unrelated to
hotel clicks and hence related to package clicks

• Flights: 300 purchases and 300 clicks. Compatible with the assumption that
200 flight purchases come from packages, no hint that more than 200 visi
tors come from packages. CORRECT

B. Impossible to assess how many packages were sold on Fireblade, always more
hotel clicks than hotel purchases and flight clicks than flight purchases. INCOR-
RECT
35

C. To gain insignts on packages look at both hotels and flights:

 Hotel: 250 hotel purchases and 180 hotel clicks: assuming a

conversion rate of 100% for hotels, there are at least 70 hotel
purchases unrelated to hotel clicks and hence related to package clicks

 Flights: 1.050 purchases and 1.000 clicks. We do not have hint that
more than 70 visitors come from packages.

70 / 1.050 = 6.7% > 5%. INCORRECT

D. Profitability is not only made by average booking rate, but also conversion
rate, commissions and cost per click. Since the above are different (and their
product is also different) profitability would remain different even if average
booking value was increased. INCORRECT

7 B
Average profit margin can be found in the following way:

Since # of clicks and conversion rate are the same for both search engines we can
either omit them or replace them in both the equations with random numbers help-
ing us with roundings (e.g. # of clicks: 1,000 and conversion rate: 10%):
 Equation for Socialbook becomes:

 Equation for Tongle becomes:

Delta is 51% - 14% = 37%

36

8 B
In order to find the lowest profit margin making the loyalty investment profitable
we need to equalize the profit margin that we get on the first 11 nights with the cost
on the 12th night (our loss, or [1 - % profit margin]). The best way of solving this
problem is plugging in results into a profitability equation and see when a profit
close to 0 but still positive is reached. The left side of the equation (profit from the
1st 11 nights) should be as close as possible to the right side but NOT LOWER, as
the company should at least break even from the program. Since we are dealing
with margins, revenue is not relevant but for clarity let’s assume that revenue is x.

Below example for answer A:

Plugging answers you will find out that the right answer is B: Without taking ratios,
understand that 0.575 / 5 > 10%

9 D
Understand the question, skim the answers and read the introductory paragraph.
There are two reasons for the team engagement: estimating the gap between future
demand and supply of natural resources, and estimate the technological innova-
tions required to compensate for it. Answers should include both of the above:

A. Gap between demand and supply not mentioned. INCORRECT

B. Gap is not between existing and future demand, but between future demand
and supply. INCORRECT
C. Not dealing with productivity increase per se, but with productivity increase
from technological innovation. INCORRECT
D. Mentions gap between demand and supply and potential of technological
innovation. CORRECT
37

10 A
In order to understand the impact of subsidy policies we need the changing variable
to be SIGNIFICANT (big enough to have a sizeable impact) and 2 clear 2 states of
the world (with and without policy) where everything else is kept CONSTANT. An-
swers should clearly outline that point:

A. Changing variable is not significant: there could be several other factors af-
fecting water prices. CORRECT
B. Significant changing variable and comparable states of the world. INCOR-
RECT
C. Significant changing variable and comparable states of the world. INCOR-
RECT
D. Significant changing variable and comparable states of the world. INCOR
RECT

11 B
Read question and skim answers. In order to answer quickly first understand
whether the share is higher for steel or water:
 Steel: (1.606 – 1.296) / 1.296 = ~23%
 Water: (9.900 – 8.600) / 8.600 = ~15%
Share is higher for water, so we are left with answers B and C

Understand which one is higher between energy and land. A quick look at the deltas
shows that energy must be higher since remaining 2020 demand for land is lower
than 2015 demand.

12 B
The reduction of 110 tons of steel would reduce water demand by 115 x 5.5 = 632.5
cubic km.

The gap between the remaining demand for water in 2020 (after productivity im-
provements) and the 2015 demand will be 9.900 – 8.600 = 1.300

The reduction as a share of the gap will be 632/1.300 = 48.7%, <50% but closer to
38

13 A
After reading the questions and skimming the answers go back to the introductory
paragraph. You will find that in 2015 cropland area extension was 110% of demand
from cropland area.

The increase in demand due to land degradation and climate change (700 Mn hec-
tares) will be less than the delta of 160 Mn hectares (10% of 2015 demand) between
2015 cropland area and 2015 demand.

14 C
Go through the answers and carefully understand the relevant exhibit:

A. Excluding everything except food/feed demand, urban expansion and biofu-

els would bring total additional demand to 71 + 25 + 20 - 8 (biomass provid-
ed as food/feed by crops dedicated to biofuels) = 108 mn hectares, equiva-
lent to ~59% of initial demand (41% reduction). INCORRECT
B. It is 1% of total demand, not of additional demand. INCORRECT
C. True, biofuels require an area of 20 mn hectares, out of which 8 mn will pro-
vide biomass for livestock feed, while 25 mn hectares are necessary for urban
expansion. CORRECT
D. Doubling biofuels production will decrease food/feed demand by another 8
mn hectares, so more than 10% of existing demand of 70 mn hectares. IN-
CORRECT
39

15 A
Use the subsidies cost to estimate the total capital invested. By spending 12 Bn USD
the state:

 Increases by 15% (from 20% to 35%) the share of capital with 15% return

 Decreases by 15% (from 55% to 40%) the share of capital with 5% return

Build a simple equation, where x is the invested capital:

16 A
The only possible reason for different impacts on returns is the higher invested cap-
ital in the steel industry compared to land:
A. Higher capital level (CORRECT)
B. Payback has no impact since figures are annual (INCORRECT)
C. Subsidy duration has no impact since figures are annual (INCORRECT)
D. Average margin is not relevant for subsidies (INCORRECT)

17 C
The director’s concern is related to the expected opposition it will receive from com-
panies who already made long term investments taking into consideration long
term incentive policies:
A. Measures are not retroactive and opposition from local governments is not
mentioned by the Director. INCORRECT
B. Cannot be inferred whether establishing a new cross-country framework will
increase or jeopardize trust from investors. INCORRECT
C. The Director is expecting strong opposition from investors. CORRECT
D. No implication about financial outlays can be inferred. INCORRECT
40

18 C
Assess the impact on profits (additional sales * profit margin) and calculate the
years to break even given the total implementation cost.
Expected impact on
Implementation cost yearly sales
Key conditions (Thousands USD) (YoY % change)
Salespeople re-training 100 5%
Hiring of technical expert 80 2%
Interiors refurbishment 350 2.5%
Exteriors refurbishment 200 1%
Total 730 10.5%

Yearly sales in Selindel are 320, so they are going to increase by 320 * 10.5% = 33.6
kUSD. Profit from the additional sales will be 3.36 kUSD. The number of years to
break even will be 730 / 3.36 = 217

19 B
The question is asking for a setup in which car manufacturers’ restrictions would be
compensated by other factors, i.e. sales / margins growth. Carefully evaluate the im-
pact of initiatives:
A. While sales growth has the current year sales as denominator, impact of re-
strictions has next year’s sales. If revenue grow by 15%, they will be 1.15 *
current revenues. However the 15% decrease will be on next year’s figure, al-
ready increased by 15% vs the current year. The increase will be then higher
than 15% of the current year’s revenues. INCORRECT
B. No need to use numbers since we are only dealing with percentages. If we
assume current year sales to be 100, next year’s sales will be 85. Current
profit is 5% * 100 = 5, which is the same as 5.9% * 85 = 5. CORRECT
C. Same as A. While sales growth has the current year sales as denominator,
impact of restrictions has next year’s sales. INCORRECT
D. Sales go from 100 to 85, but a 15% profit margin would bring profits to ~13,
greater than the current 5. INCORRECT
41

20 A
The single brand restriction has a negative impact on sales and therefore on profits.
The roll out order should be the one minimizing losses:

Single brand restriction

Expected
yearly sales Expected Delta in sales Delta in Or-
Area (Mn USD) profit margin (Thousands USD) profits der
Newstock 1.3 5.0% -130 -6.5 4
Bolzano 1.3 4.0% -130 -5.2 3
Stockport 1.9 5.0% -190 -9.5 6
Ventura 2.0 4.0% -200 -8 5
Grange 2.7 1.0% -270 -2.7 1
Selindel 3.2 1.0% -320 -3.2 2

21 C
Understand the context: if car manufacturer’s restrictions are implemented, the
business will not be sustainable. Go through the answers and carefully understand
if any of them describes a way of bringing the business back to sustainable terms in
the short term:

A. Possibly another investment in the future, but could do little to bring the
business to profitability if restrictions are implemented. INCORRECT

B. An optimization initiative, unlikely to bring the business to profitability if

restrictions are implemented. INCORRECT

C. Different margin sharing agreements would change Lingo’s financial health

immediately. CORRECT

D. Current profitability is not the issue, but future profitability. INCORRECT

42

22 C
Distinguish what COULD challenge the conclusion and what does challenge the
conclusion for sure:
A. Could challenge conclusion: since manufacturers do not have websites we
don’t know how the picture will be when they will have one. INCORRECT
B. Does not challenge conclusion: even if touch points decreased they are still
the majority. INCORRECT
C. Does challenge conclusion. If you discount the car dealerships touch points
by 30%, car dealers won’t be anymore the main driver of purchasing
decisions. CORRECT
D. Does not challenge conclusion in the situation as it is today. INCORRECT

23 C
Total commissions are the product of commission (%), share of sales and car price,
but since the car price is the same for all cars we can omit it in the equation

Commission:
Gross profit share of car Total commis- Share of total
margin price Share of sales sions commissions
0%-5% 5% 10% 0.5% 2.8%
5%-10% 15% 30% 4.5% 25.0%
10%-15% 20% 40% 8.0% 44.4%
15%-20% 25% 20% 5.0% 27.8%

Difference then would be 27.8% - 2.8% = 25%

43

24 A
Calculate the average commission according to the existing plan.

Commission:
Gross profit mar- share of car Total commis-
gin price Share of sales sions
0%-5% 5% 10% 0.5%
5%-10% 15% 30% 4.5%
10%-15% 20% 40% 8.0%
15%-20% 25% 20% 5.0%
Total 18.0%

A possible, simple way of answering the question is taking one of the answers as a
benchmark and evaluate the difference in all other plans. In our example we took
the current compensation plan as benchmark. Lower commission implies higher
profits, keeping all other factors the same. Since prices do not vary, we consider
them to be equal to 1.

Commission Delta vs.

Average com- delta vs. cur- Sales (current current
Answer mission rent plan plan = 100) plan
A 12% 6% 90 5.4
B 15% 3% 100 3
C 20% -2% 130 -2.6
D (Existing plan) 18% - 100 -

A would give the highest profit.

44

25 A
Maximizing Return on Invested Capital (ROIC) implies maximizing the ratio be-
tween returns from the new investments and investment outlays from shareholders.
Identify which question is least likely to be a reason for this choice:
A. Highest ROIC does not imply highest return. In this case for example the
Body Shop has the highest ROIC but the Electric Shop the highest operating
margins. CORRECT
B. Average return is likely to be increased by these initiatives, as stated by the
CEO as one of the key objectives. INCORRECT
C. By choosing initatives according to the ROIC ratio, you select only the ones
with the highest returns. INCORRECT
D. Returns on new initiatives are likely to be much higher and markets to
perceive that Lingo Car has a growth potential. INCORRECT

26 D
Since Operating Profit = Market Revenue * Expected market penetration (%) * Op-
erating profit margin (%), any percentage increase in any of the 3 factors translates
directly in the same increase in operating profit.
Required Operat-
investment Market reve- Expected ing prof- Operat-
(Millions nue (Millions market pen- it mar- ing Rank-
$) $) etration (%) gin (%) profit ing
Glass
Repair 12 1200 8.50% 25% 25.5 3
Body
Shop 15 1700 10% 20% 34 2
Electric
Shop 20 1300 9% 30% 35.1 1
Trucco 23 800 5% 50% 20 4
Car
Rental 25 700 12% 15% 12.6 5

The ratio between the highest operating profit (Electric Shop) and Glass Repair’s
operating profit is 1.38. Therefore a 38% increase in Expected market penetration of
Glass repair would give the same increase to Glass Repair’s operating profit. The
figure closest to 38% is 35%
45

Answers
Question Answer Your Question Answer Your
answer answer
1 D 14 C

2 B 15 A

3 D 16 A

4 B 17 C
5 D 18 C

6 A 19 B

7 B 20 A

8 B 21 C

9 D 22 C

10 A 23 C

11 B 24 A

12 B 25 A

13 A 26 D