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Dear John,
Seek for your advise on this question:
Z plc currently sells products Aye, Bee and Cee in equal quantities and at the same selling price per unit. The contribution to sales ratio for product Aye is 40 per cent; for product Bee it is 50 per cent and the total is 48 per cent. If fixed costs are unaffected by mix and are currently 20 per cent of sales, the effect of changing the product mix to:
Aye 40% Bee 25% Cee 35%
is that the total contribution/total sales ratio changes to:
(a) 27.4%
(b) 45.3%
(c) 47.4%
(d) 48.4%
(e) 68.4%Thank you
Why are you attempting a question for which you do not have an answer? You should be using a Revision Kit from one of the ACCA approved publishers.
First you need to calculate the CS ratio for Cee. Since they are currently selling in equal quantities at the same selling price, the total revenue is the same for each of them.
Suppose the revenue is $100 for each (or any number you want – it will give the same result) then the total revenue will be $300 and therefore the total contribution will be 48% x $300 = $144.
Because know the CS ratios for Aye and Bee, you can work out the contribution from each of them, so the contribution from Cee must be the missing figure which is $54 and therefore the CS ratio for Cee is 54%.Now take the same total revenue of $300 and split it between the three products in the new product mix. Calculate the contribution for each product using the same CS ratios as before and calculated the new total contribution. Divide this by the total revenue of $300 and you have the new total CS ratio 🙂
There is actually an answer for this question but from two different sources and both gave different answer
Colin Drury textbook:
Contribution/sales (%) = (0.33 * 40% Aye) + (0.33 * 50% Bee) + (0.33 * ? Cee) = 48%
Cee = 54% (Balancing figure)
The total contribution/sales ratio for the revised sales mix is: (0.40 * 40% Aye) + (0.25 * 50% Bee) + (0.35 * 54% Cee) + 47.4%
Answer (c)From the internet:
Answer B.
This is a classic of encountering an unfamiliar term, but the solution is similar to other problems. Contribution to sales ratio is basically contribution margin ratio, and all it is asking you for is getting the weighted average contribution margin ratio, similar to multiple product CVP analysis.
40% x 40% + 25% x 50 % + 35% x 48% = 45.3%The correct answer is 47.4%, and I explained the most obvious way of calculating it in my previous answer.
The reason the answer from the internet is wrong is that the the CS ratio for Cee is 54% and not 48%. You could have taken that approach, but the workings should be:
(40% x 40%) + (25% x 50%) + (35% x 54%) = 47.4%I do explain all this in my free lectures on CVP analysis, and if you are watching my free lectures then you do not really need a text book because the lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well (and are specifically directed at the current exam syllabus).
However you choose to study you should buy a Revision Kit from one of the ACCA Approved Publishers rather than using Drury or finding questions on the internet. The Revision Kits are full of past exam questions and other exam standard questions in the current exam format.
There is actually an answer for this question but from two different sources and both gave different answer
Colin Drury textbook:
Contribution/sales (%) = (0.33 * 40% Aye) + (0.33 * 50% Bee) + (0.33 * ? Cee) = 48%
Cee = 54% (Balancing figure)
The total contribution/sales ratio for the revised sales mix is: (0.40 * 40% Aye) + (0.25 * 50% Bee) + (0.35 * 54% Cee) + 47.4%
Answer (c)From the internet:
Answer B.
This is a classic of encountering an unfamiliar term, but the solution is similar to other problems. Contribution to sales ratio is basically contribution margin ratio, and all it is asking you for is getting the weighted average contribution margin ratio, similar to multiple product CVP analysis.
40% x 40% + 25% x 50 % + 35% x 48% = 45.3%
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