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Mylo is now considering investing in a specialty coffee machine . He has estimated the following daily result for the new machine ;
$
Sales 650 units 1300
Variable cost. (845)Contribution 455
Fixed cost. ( 70)
Profit. 385Which of the following statements are true regarding the sensitivity of this investment
1)The investment’s sensitivity to the incremental fixed cost is 550%
2) Margin of safety is 84.6%Both are correct answers according to Kaplan and I agree except for how they got BEP.
Please how do Kaplan calculate BEP to be 100 units ( 70/0.7) ? How did they get the contribution per unit of 0.7?
Margin of safety 650 – 100 = 550 units which is 550/650 = 84.6%.
The contribution is $455 when 650 units are sold. Therefore the contribution per unit = 455/650 = $0.70.
I assume that you have watched my free lectures on CVP analysis, in which case you should be happy that for breakeven the total contribution must equal the fixed costs. Therefore we need a total contribution of $70. At $0.70 per unit, this means 70/0.7 = 100 units.
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