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Vita says

Hello, could you please shortly explain the difference between Product-line pricing and Complementary products?

The lectured example of razors sounds to me more like the pricing of complementary products.

This is an example illustrating my understanding of Product-line pricing: Toyota and Lexus are produced by the same company, but Lexus is more expensive than Toyota as it is supposed to have higher quality (more luxury). So Lexus is priced higher for richer people and Toyota is priced lower for poorer people. And not necessarily the same person will buy both cars (although it is possible) as they are not complementary goods (should not be used together).

John Moffat says

What you say is correct except that rather than comparing two different models, better is to compare different models of the same car – one with more features and a higher price, and one with fewer features at a lower price.

Stylianos says

Hello Sir,

I am confused in Test 1. Total cost is 26 and the company wants to make GPM of 20% using absorption cost. Why B and not C? It is not clear for me even in the answers.

Thank you very much.

John Moffat says

A gross profit margin is the profit as a % of the selling price. For every 100 selling price, the profit will be 20 and therefore the cost will be 80.

If the cost is 26 then the selling price will be 100/80 x 26 = $32.50

GPM’s are always profit as a % of selling price; mark-ups are always profit as a % of cost.

Stylianos says

Great explanation and totally clear. Thank you very much!

John Moffat says

You are welcome

Mashal Khan says

Did we miss price elasticity of demand? Is it not in the course ?

John Moffat says

It isn’t lectured, but it is in the lecture notes and should make sense from there.

khan says

I am realy thankful to you sir, you make this topic too easy for me to understand

THANKS once again

John Moffat says

Thank you

nigelc says

Makmuqul, the equation is the derivative (differentiation) of the Total Revenue (TR) formula.

Selling Price P = a – bQ

Total Revenue, TR = PxQ = (a – bQ) x Q

= aQ – bQxQ

If we differentiate TR (ie find dTR/dQ) that last equation, we get a – 2bQ.

That is the marginal revenue. That is, the derivative of TR gives the marginal revenue (MR) or the rate of change of revenue for each unit increase in quantity.

So, P is the selling price.

TR = PxQ

MR = derivative/differentiation of TR = a -2bQ.

John Moffat says

Fine (and I go through this in the lecture and so I don’t know why you have repeated it), except that differentiation is explicitly not examinable in any of the ACCA exams.

That is why the formula for the marginal revenue is given in the exam.

maqmukul says

Dear Sir

I am confused about MR=120-0.002Q

John Moffat says

The formula is given on the formula sheet, once you have calculated a and b for the price demand equation.

Mohamed says

hi sir,

Are the exchange rates of a currency in different countries one of the kind of price discrimination when they are sold by fin.institution with a profit?

John Moffat says

No, because it is not the company who determines the exchange rates. Price discrimination is when they deliberately charge different prices, irrespective of the exchange rates.

Mohamed says

thank you sir.

John Moffat says

You are welcome

raid says

Hello there, Mr. Moffat, I got a question related to the test that is at the end of chapter 7.

Question 1 asks about the selling price of the product, my answer was as follows:

10+8+3+5=26*120%=31.2 which gives the answer C. My answer was based on the assumption that it’s profit margin, since the company wishes to make a gross profit margin of 20%.

But in the answers behind, your solution was based on the assumption as if it’s a mark up which gives the answer B!

Could you please explain how did you reach to that assumption?

John Moffat says

In future it is better if you ask this sort of question in the Ask the Tutor Forum rather than as a comment on a lecture.

The answer is correct.

A gross profit margin of 20% means that the profit is 20% of the selling price (and therefore the cost is 80% of the selling price).

What you are doing it treating it as though it is a mark-up of 20% which would mean the profit was 20% of cost.

It will help you to watch the Paper F3 lecture on mark-ups and margins.

raid says

Got it, thanks Mr. Moffat.

sunday says

Is understood. Thanks

Jonny says

In example 6 where you work out the 1st equation to get P=120 – 0.001Q I dont not understand why, in the next step, to calculate Maximum profit, you then set out the equation as 120 – 0.002 = 5.

Why 0.002 when in the previous equation b = 0.001?

John Moffat says

Because it is the marginal revenue equation. I do explain this in the lecture, and also the formula is given on the formula sheet.

aliimranacca007 says

i need lecture for price elasticity of demand,,because i enjoy your lecture too much ..i hate BPP text book.

John Moffat says

I probably will record a lecture – but only when I have the time.

However it is explained well in the lecture notes (and the lectures and the lecture notes go together – using just one or the other is no good)

desola says

thank you very much sir, am preparing for f5 september 2015 diet and i realy find your lectures helpful. please do i need to still use my bpp exam kit as the kit is too bulky and i go to work everyday or can i just use open tution lecture note and will be sure of passing brilliantly by Gods grace.

John Moffat says

You must use your Revision Kit because it is vital to practice as many exam standard questions as possible.

The lectures will give you the knowledge you need, but you need the Revision Kit for practice.

aliimranacca007 says

Dear sir why you not explain price elasticity of demand?

Josephat says

love it, thank you for the lectures.

John Moffat says

I am pleased that you like them

oni says

thank you for the lecture, however there is something on example 6 i don’t understand the selling price was not stated either to increase or reduce

John Moffat says

In pricing questions we always assume that the price/demand relation ship is linear.

Because of that, in this example, if the price goes up by $2 then the demand will fall by 2,000 units, but also, if the price goes down by $2 then the demand will increase by 2,000 units.

vttrang says

Sir, is it also that revenue is maximised when marginal revenue = 0?

Thanks in advance.

fahim231 says

hello sir

I just noticed on example 6 you did not work out the formulas for total revenues or even total cost…….Does this mean you do not need these to derive at the answer? You can simply work it out from the marginal revenue = marginal cost formula?

Thanks in advance

John Moffat says

Although you could be asked to calculate total revenue and/or total cost, if you are simply asked to state which selling price will result in maximum profit then all you need to do is use the fact that for the optimum then it is when MR = MC.

amg says

Very useful ! Thanks a lot