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W/A C/S Ratio

Forums › Ask CIMA Tutor Forums › Ask CIMA P1 Tutor Forums › W/A C/S Ratio

  • This topic has 4 replies, 2 voices, and was last updated 4 years ago by Cath.
Viewing 5 posts - 1 through 5 (of 5 total)
  • Author
    Posts
  • February 5, 2021 at 9:31 pm #609346
    Anonymous
    Inactive
    • Topics: 1
    • Replies: 2
    • ☆

    Hi, could anyone help me understand the below?

    A company provides three different levels of customer service support for one of its software products. The following data relate to these three levels of support:

    Support level Superior Standard Basic
    Annual fee 1,000 750 400
    Annual variable costs 450 250 180
    Annual fixed costs
    (see note below) 200 100 50
    Profit 350 400 170

    Note: The total annual fixed costs are budgeted to be $1,000,000. None of these costs are specific to any type of customer service support.

    Assume that the number of customer service support contracts sold are in the proportion:
    Superior 20% Standard 30% Basic 50%

    The annual revenue that needs to be generated in order to break even is closest to?

    The answer provided is $1,690,000.

    Product Sales mix Contribution per contract Weighted average contribution
    $ $
    Superior 20% 550 110
    Standard 30% 500 150
    Basic 50% 220 110
    370

    Breakeven point in units = $1,000,000 / $370 = 2,703 contracts

    If these are sold in the proportion 20%:30%:50% then this gives sales of
    Superior = 2,703 × 20% = 540.6
    Standard = 2,703 × 30% = 810.9
    Basic = 2,703 × 50% = 1,351.5

    Multiplied by the sales revenue per contract gives total revenue of
    (540.6 × $1,000) + (810.9 × $750) + (1,351.5 × $400) = $1,689,375

    My only question is, because it is asking for revenue required, why would the answer not use sales mix % * WA C/S Ratio?
    I have a very similar question on the same exam and to get the answer you;
    Get the sales mix of each
    Work out the individual c/s ratio (EX Superior 550/1000)
    Do the same for all three, add them together and then divide this by the total FC to get the revenue?

    I just want to be sure I know the difference of when to use one and the other please.

    Thanks in advance.

    February 6, 2021 at 8:38 pm #609479
    Anonymous
    Inactive
    • Topics: 1
    • Replies: 2
    • ☆
    February 12, 2021 at 11:52 pm #610185
    Cath
    Participant
    • Topics: 0
    • Replies: 447
    • ☆☆☆

    Hi Abbie,
    Yes great question & a common well known problem with breakeven /CVP multiproduct calcs

    You can indeed do this in the method that you mentioned at the end (see above)… you will notice that this brings a different answer ( quite a ‘few’ thousand different!))
    Both methods are acceptable & when CIMA Objective test writers create questions in topics like this – they allow for all different methods to be used…

    So… they will give you a multiple choice & you pick the nearest answer ( even if its not that near.. both methods would have been pre-calculated by question writer to ensure that either method gets full marks)… or alternatively they will design the question so that either method gives similar answers ( eg – nice round numbers) …

    Anyway = in summary – dont worry, your alternative method is entirely appropriate & CIMA/ question writers are pre-empting the rounding type problem so that you cant be penalised in the exam for this

    Thanks
    Cath

    February 13, 2021 at 4:23 pm #610269
    Anonymous
    Inactive
    • Topics: 1
    • Replies: 2
    • ☆

    Hi Cath,

    Great thank you for confirming 🙂 Thanks for the reassurance.

    Thanks

    March 4, 2021 at 7:58 pm #613386
    Cath
    Participant
    • Topics: 0
    • Replies: 447
    • ☆☆☆

    No problem… good luck with the P1 exam

  • Author
    Posts
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