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Example 3
A company had budgeted sales of $30.9 million within a market worth $61.8 million. When the budget was drafted, it was assumed that inflation would be 3%. After the end of the budget period, it was discovered that inflation had been 2% and that the market had been worth $65 million.
What is the sales revenue figure which should be used when assessing company performance (to one decimal place)?$ ____________ million
What does this test?
? Understanding of the impact of external considerations on performance.What is the correct answer?
? The correct answer is $32.5 million
Sales forecast adjusted for inflation only: 30.9 x 1.02/1.03 = 30.6
$61.8 million would have included inflation of 3%, so adjusting that for the actual 2% inflation, 61.6 x 1.02/1.03 = 61.2
Market growth = 65/61.2 = 1.0621
Therefore, a fair sales figure to aim for would be: 30.6 x 1.0621 = 32.5————
How i did it:I assumed that budget sales and market size figures given is adjusted for 3% inflation
So i calculated the market share of 50 % from the budget numbers (30.9 / 61.8 *100)Then applied 50% market share, to the revised market size of 65m (assuming this is also adjusted for 2% indlation) to get 32.5 million.
Sir, even though i got the correct answer, I do not understand the inflation adjustment done in the solution provided by examining team. Could you pls help?
The budgeted sales included inflation of 3%. Without inflation it would have been 30.9 / 1.03 = 30. Given that the actual inflation was 2% then the would have expected sales of 30 x 1.02 = 30.6.
Similarly, had the market not grown then the actual market should have been budgeted as 61.8 / 1.03 x 1.02 = 61.2
Since the actual worth of the market was 65, then the market had grown by 6.21% and therefore we should expect the sales to have been 30.6 x 1.0621 = 32.5.
There are several ways of getting to this answer (and I would not have done it the way in the examiners report) but that does not matter. If you got the correct answer then there is nothing to worry about (obviously in section A and B questions nobody would see your workings anyway 🙂 )
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