Case Interview Question #00334: Our client CarMax (NYSE: KMX) is a used car retailer and dealership headquartered in Richmond, Virginia, USA. Their business has been stagnating in recent years. They are located in a low to middle-income area and in the past have only sold cars to customers who are willing to pay 100% of the cost up-front or can obtain bank financing. In order to boost sales, CarMax is considering offering car loans to customers that the dealership itself will finance.
To be eligible for a loan, customers must undergo a complete credit check (which we assume to be accurate). The credit check rates potential car buyers on a scale of 0 to 100, where 0 corresponds to a 0% chance of paying off the loan and 100 corresponds to a 100% chance of paying the loan in full. Each loan only lasts 1 year in which payments are made monthly and the entire loan will be paid off in 1 year’s time. Buyers ultimately fall into two categories, those that pay off the loan entirely, and those that default.
The Question: What should be the cutoff level where CarMax decides to give potential buyers the loan? What issues might cause you to alter this cutoff-level?
Additional Information: (to be given to you when asked)
- Average cost of a used car to CarMax: $6,000.
- Average price of car sold to customer: $7,000.
- Minimum down payment for all customers: $1,000.
- Average loan defaulter makes three months of payments before defaulting.
Although this case looks like a typical “starting a new business/service” case, I did not really use any framework because this case is more of a question of establishing where the break-even marks would lie. I did all the calculations on the average.
Candidate: So what is the average cost of each car and how much does our client CarMax sell them for?