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Clarification on question

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Clarification on question

  • This topic has 3 replies, 2 voices, and was last updated 4 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • August 13, 2020 at 8:36 am #580349
    leo10
    Member
    • Topics: 36
    • Replies: 18
    • ☆☆

    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?

    August 13, 2020 at 3:55 pm #580399
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    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 )

    August 13, 2020 at 9:36 pm #580457
    leo10
    Member
    • Topics: 36
    • Replies: 18
    • ☆☆

    Thank you Sir for the clear reply.

    August 14, 2020 at 9:49 am #580504
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘Clarification on question’ is closed to new replies.

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