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I was reading and examiner answer. It said a line but I was unable to understand. Please clear me.
It says that, “Operational gearing is 950% so it means that Sales decrease by 10% so Operating profit will fall by 9.5 times or 950%”.Please can you tell me the date of the exam you are referring to?
The reason I ask is that operational gearing is not in the Paper PM syllabus (it is in the Paper FM syllabus, which is why it is covered in my Paper FM lectures). Also, if you have copied the quote correctly then I think it is wrong 🙂
Its operating gearing is 950%, indicating that if sales volume fell by 10%, then its profit before interest and tax would fall by 95% (that is 950% or 9·5 times more)
This is exact… She missed the word volume.
Flag and Budget Co, Part A, september/december 21As I wrote before, this should not really have been asked in Paper PM because it is only in the Paper FM syllabus.
However given that the examiner has defined the operating gearing in the question (although it is not the normal definition!) it is OK.
Suppose the company makes a profit before interest and tax of 100. Since the operating gearing is written as being the contribution/the profit, it means that the contribution must be 950 (which means there must be fixed costs of 850).
If the sales volume falls by 10% then the contribution will also fall by 10% and would therefore be 855. The fixed costs would remain at 850, and therefore the profit before interest and tax will be 5.So the profit will have fallen from 100 down to 5, which is a fall of 95% 🙂
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