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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 price2. 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?
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 )
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