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Mylo is now considering investing in a speciality 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 only
Excuse me sir,I have a qusetion how to know The investment is more sensitive to a change in sales volume than sales priceIf the sales volume changes then both sales and variable costs (i.e. the contribution) will change.
If the sales price changes, then only the sales revenue changes.Sensitivity to sales vol is 385/455 = 84.6 %
Sensitivity to sales price = 385/ 2 =19250 % is that how we conclude it?
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