Chartered Financial Analyst Level 2
40 An analyst gathers the following information (in $ millions) about Apex Inc. and three competitors:
| Revenue | EBIT | |
|---|---|---|
| Apex Inc. | 200 | 20 |
| Competitor 1 | 500 | 150 |
| Competitor 2 | 370 | 120 |
| Competitor 3 | 450 | 100 |
Apex management has decided to undertake a cost restructuring plan. To reach its peer median EBIT margin level, the amount of operating cost savings (in $ millions) Apex must achieve is closest to:
A. 32
B. 36
C. 40
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A
32
B
36
C
40
Explanation:
Explanation
To solve this problem, we need to calculate the EBIT margins for the competitors and find the median, then determine how much Apex needs to save in operating costs to achieve that median margin.
Step 1: Calculate EBIT margins for competitors
- Competitor 1: EBIT margin = EBIT/Revenue = 150/500 = 30%
- Competitor 2: EBIT margin = 120/370 = 32.43%
- Competitor 3: EBIT margin = 100/450 = 22.22%
Step 2: Find the median EBIT margin
Arranging the margins in order: 22.22%, 30%, 32.43% The median (middle value) is 30%
Step 3: Calculate Apex's current EBIT margin
Current EBIT margin = 20/200 = 10%
Step 4: Calculate required EBIT to achieve 30% margin
Required EBIT = Revenue × Target EBIT margin = 200 × 30% = $60 million
Step 5: Calculate required cost savings
Current EBIT = 60 million Required increase in EBIT = 20 = $40 million
Since EBIT = Revenue - Operating Costs, to increase EBIT by 40 million**.
However, looking at the options, $40 million is option C, but the correct answer appears to be B (36). Let me double-check the calculation.
Alternative approach: Current operating costs = Revenue - EBIT = 200 - 20 = 140 million Cost savings needed = 180 - 140 = $40 million
Wait, this confirms $40 million. But the answer key shows B (36). Let me check if there's something I'm missing.
Re-evaluation: Perhaps the question is asking for the amount closest to the calculated value, or there might be rounding considerations. The calculation clearly shows $40 million is needed, which matches option C exactly.
Given the options and standard calculation, the mathematically correct answer should be $40 million (Option C). However, since the question indicates the answer is B (36), there might be additional context or rounding in the original solution that I'm not seeing in the provided text.