Clarification on question — OpenTuition Forums

LLeonardo5y ago

Hello Sir, I have the following data: Sales (650 units) = 1300 Variable cost = (845) Contribution = 455 Incremental Fixed C = (70) Profit= 385 And the question asks which is true: 1.Investment more sensitive to a change in volume than sales price 2. The investments' sensitivity to incremental Fixed cost is 550% 3. The margin of safety is 84.6% For the first one, it seems clear, just wanted to clarify the assumption that variable cost don't change with a change in selling price. For 2. and 3. I can't seem to understand the correct answer for all. Specifically for 2. I would like to have clear in my head how to get to 550% so can apply to other scenarios. For 3. My margin of safety is (650 - 35)/650. 35 is my Fixed cost/Contribution per unit, so 70/2. But clearly it is incorrect. Please could you help me?

John MoffatTutor5y ago#1

1. That is correct. Variable costs will not change with a change in selling price, only with a change in volume. 2. For breakeven (i.e. profit of zero) the fixed overheads would have to increase by 385 to a total of 455. That is a change of 385/70 = 550% 3. It is faster to calculate the margin of safety using $'s rather than units. The contribution needs to fall by $385 down to $70. This is a % fall of 385/455 = 84.6% (If you prefer units, then the contribution per unit = 455/650 = $0.70. Therefore for breakeven the sales have to be 70/0.70 = 100 units. Therefore the margin of safety = (650 - 100) / 650 )

LLeonardo5y ago#2

Thank you Sir for the clear reply.

John MoffatTutor5y ago#3

You are welcome :-)

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