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Sir this is a past Acca exam question:
Mylo is now considering investing in a specialty coffee machine. He has estimated
the following daily results for the new machine:
$
Sales (650 units) 1,300
Variable costs (845)
–––––
Contribution 455
Incremental fixed costs (70)
–––––
Profit 385
–––––
Which of the following statements are true regarding the sensitivity of this
investment?
(1) The investment is more sensitive to a change in sales volume than sales price.
(2) If variable costs increase by 44% the investment will make a loss.
(3) The investment’s sensitivity to incremental fixed costs is 550%.
(4) The margin of safety is 84.6%.
A (1), (2) and (3)
B (2) and (4)
C (1), (3) and (4)
D (3) and (4)Sir here when the statement says that investment’s sensitivity to incremental fixed costs is 550%., so basically the examiner has divided 385 by 70 and has obtained 550% and hence proved that this statement is correct
Similarly in statement 1 examiner has divided 385 by 1300 and had obtained 29.6%
likewise , if we divide 385 by 650 units so we will get 59%, so isn’t this proving that investment is more sensitive to change in sales volume than sales price?
No – it proves the reverse.
Sensitivity of 59% means that sales volume would need to change by 59% for the profit to fall to zero. Sales price would only need to change by 29.6% for the profit to fall to zero – therefore sales price is more sensitive to change than is sales volume.
Sir the sensitivity here is not 59%. The breakeven sales volume here is 100. so sensitivity shoud be (650-100)/650
You are right.
However I answered this post three years ago and almost certainly did not even check the figures because human was not asking me to. He/she was asking why a bigger figure for the sensitivity meant that it was more sensitive which is not the case and I explained why.
Presumably you have the answer in your Revision Kit to check to anyway 🙂
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